Analysing Australia's broken private renting system

The Australian residential rental market doesn’t work for landlords or renters.

Australia has one of the least tenant-friendly rental markets in the developed world, which probably explains why fewer than one in five current tenants say they prefer renting to owning.

Property managers, often caught in the crossfire between landlords and tenants, report some of the highest turnover rates of all occupations.

And, contrary to popular perception, most landlords are having a rough time too, with new analysis showing their post-tax returns do not even beat a balanced super fund, which comes without the hassle of maintenance, vacancy or tenant issues.

In fact, the only cohort of Australians keen to maintain the status quo in the private rental market would be removalists, with nearly 80% of the nation’s 2.9 million renting households having moved in the past five years.

In the second of a three-part series on Australia’s property crises, LongView and PEXA have conducted a deep dive into the state of the residential rental market.

The conclusion is clear; the system is broken. The interplay between individual properties, landlords and renters is exacerbating existing problems, particularly for the vulnerable in society, and requires systemic solutions.

Owning property provides people with the feeling of dignity and security, and historically renting has been viewed as a temporary arrangement, serving as a stepping stone towards homeownership. However, the deteriorating affordability of property ownership has led to an increasing number of households remaining in rental properties on a permanent basis.

More than 22% of all households in Australia rented privately in 2006. Today that figure is up 4 percentage points to 26%. Significantly, 43% of renters have been renting for a decade or more.

Rental prices have been rising for decades in Australia – and many property managers are currently reporting the most rapid rent increases they have ever seen – and yet the rental experience continues to be poor compared to other developed countries due to our rental laws and regulations.

Rising rental costs impact poorer households the most, with two thirds of low-income households now allocating more than 30% of their disposable income towards rent payments. The high priority of rent payments for these households mean that unaffordable rents can force households to make sacrifices in other essential areas, such as food. And unexpected moving costs – running to thousands of dollars a time – can result in genuine financial hardship.

At the same time, competition for rental properties has been so intense that one of the biggest challenges for lower income families is actually finding a rental at all. Vacancy rates in Sydney, Melbourne and Brisbane are at their lowest in a generation and continuing to worsen. In Sydney, it has recently been reported that 80% of renters pay more than the asking price. And if you’ve been evicted from one property, you’re a less appealing prospect for a landlord. Homelessness becomes a real risk.

The biggest issue for most renters is tenancy insecurity – constant uncertainty about whether the landlord will terminate the lease and force you to move. Unlike other countries, long-term leases that provide secure tenancy are rare. At another level, the difficulty in owning a pet or making minor alternations – something as simple as hanging a picture – without the say-so of an agreeable landlord make it difficult to turn a house into a home.

The problem identified in the LongView/PEXA whitepaper is that the biggest issues for renters are partly the result of a system that does not work for landlords either.

The truth is that property investment is often complex, stressful and risky. It can be much more time-consuming than expected and unanticipated maintenance costs (a new roof?) are not uncommon. Such difficulties partly explain why half of all investment properties exit the rental market within five years. The other explanation could be the poor returns.

Exclusive analysis conducted for the Whitepaper reveals that, even before the one-off costs, the median total post-tax return of investment properties held for 4-10 years between 1990 and 2020 is just 6.3%. This compares with the post-tax return of 7.4% from a balanced superannuation fund, which involves considerably less risk and hassle. Put another way, about two thirds of landlords would have had better returns on investment and effort if they put their money into superannuation instead.

The poor experience of landlords is closely related to the insecurity that underpins poor rental experiences for renters in Australia. About 21% of all tenancy terminations are landlord-initiated – that is, involuntary for the tenant – and 43% of these are due to the sale of the property.

Such miserly returns also disincentivise spending on maintenance, which goes to explain the slow responses of landlords on basic (or even essential) maintenance and the generally shabby nature of a large portion of the nation’s rental housing stock.

Blaming landlords or renters for the problems in the system is a false battle. At the moment, the two parties have fundamentally incompatible needs, with tenants needing security and landlords needing flexibility.

As such, solutions to these challenges need to create a greater separation between the needs of individual landlords and individual renters. Only then will Australia’s private rental market serve the interests of renters and landlords – not just removalists – in a way that is sustainable over the long term.

Evan Thornley is Executive Chair of LongView. Glenn King is Chief Executive Officer of PEXA Group.