A broken system: Private renting not working for either landlords or renters

Private renting in Australia is a “broken” system, where renters face acute affordability challenges and rising insecurity while most landlords would be better off putting their money in superannuation, new analysis by LongView and PEXA has argued.

The whitepaper, Private renting in Australia: a broken system, is the second instalment of a three-part series that explores the origins of the nation’s housing crisis with a focus on the twin challenges of rental affordability and rental experience. It identified the need to address the incompatibility between renters’ need for security and landlords’ need for flexibility, to deliver long-term solutions for the 2.9 million households that rent, and the nation’s 2.2 million property investors.

The analysis found that investment properties held for four to 10 years between 1990 and 2020 have the median total post-tax return of just 6.3% – lower than the post-tax return of 7.4% from a balanced superannuation fund, which involves considerably less risk and is much lower maintenance.

Other key findings from the whitepaper include:

• the mounting number of renters across all socio-economic groups and household types, with more than one in four households now renting
• deteriorating purchase affordability has led to a rising number of households remaining in rental properties on a permanent basis
• tenure insecurity is poor, with 36.5% of renters moving three or more times in the past five years, and 21% of all tenancies terminated by the landlord
• historically, rent costs have grown at one third of the rate of house prices and have matched median incomes, but have significantly outpaced pensions and other welfare benefits
• vacancy rates are at the lowest they have been in over two decades in Sydney, Melbourne and Brisbane, with many property managers reporting the most rapid rent increases they have seen
• the current system contributes to Australian renters having one of the worst rental experiences in the developed world 
• investing in property is frequently more involved, more complex and less financially rewarding than landlords expect, with overall returns comparable to lower-risk, lower-effort investments
• half of all investment properties exit the rental market within five years, creating even more insecurity among renters.

One of the most compelling findings of the research was that the private rental market was not delivering for property investors, with the system structured in a way that led to even worse experiences for renters through increased tenancy insecurity and poorer housing stock.

“There is a misplaced idea that a battle between landlords and tenants exists – in actual fact, the Australian rental framework has been broken for decades, and is not working for either party,” said Evan Thornley (pictured above left), LongView executive chair.

“Secure shelter provides people with the feeling of dignity and security, enabling us to build relationships and feel part of a community. So the fact that we are facing the biggest rental crisis in a generation should be of concern to all of us.

“For landlords, investment is often more complex, stressful, and risky than originally anticipated. It can be much more time-consuming than expected, with a range of unanticipated maintenance costs. And 60% of landlords get returns lower than if they had put their money into superannuation. In most cases, this is because they bought poor-performing properties.”

This partly explains why half of all investment properties exit the rental market within five years, and with surging interest rates, the situation could become much worse. With sale the most common reason for landlord-initiated lease terminations, the poor experience of landlords is closely related to the insecurity that underpins poor rental experiences for renters in Australia, the study found.

“The status quo creates problems for both renters and landlords,” Thornley said. “Solutions to these challenges need to create a greater separation between the needs of individual landlords and individual tenants, to create a system that works for everyone. Only then will Australia’s private rental market serve the interests of renters and landlords in a way that is sustainable over the long term.”

Glenn King (pictured above right), PEXA CEO, said several issues plagued the private rental system, resulting in suboptimal outcomes, particularly for low-income families and the vulnerable.

“Australia is already one of the hardest places in the developed world to be a renter,” King said. “The biggest problem is insecurity – long term leases are rare, and renters live with constant uncertainty about whether they will have to move. For renters who are constantly required to move, this impacts their ability to feel part of a community, it affects continuity of schooling for children, and renters often face unexpected moving costs – often thousands of dollars per move – which could push many on low incomes into greater levels of financial stress.

“Maintenance is often a headache and there are few incentives for the landlord to improve properties, for example through energy retrofitting. Renters often have limited ability to make minor alterations. These factors combined make it difficult for renters to make a home out of their rental accommodation.

“Although median wages have largely kept pace historically, rent is increasingly unaffordable for lower income people and some of Australia’s more vulnerable demographics. More concerning, the difficulty in acquiring and keeping private rental accommodation is a leading cause of homelessness.”

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