The Party for Renters
Can the party for aspiration also be the party for renters? We’d better hope it can, because more and more people of all demographics and political persuasions are renting, and we need their votes. In the good old days, when home ownership was affordable and widely accessible, we could afford to focus on the concerns of home owners at the expense of renters. They weren’t exactly our target demo. Today, we do so at our peril. The demographics of renters has shifted – there are now far more medium and high-income renters than low-income renters. This is because many families and young people want to live in good suburbs but are priced out and have no choice but to rent. In many cases these people would be inclined to vote Liberal, but why would they now? What notable policy have we offered that would help them get by as renters? We’ve simply vacated the space and left Marxist Max (Chandler-Mather) to be the renters’ champion.
Perhaps some in the party are still of the mindset that helping renters inevitably means disadvantaging landlords, driving investors out of the market and hurting housing supply and affordability. I agree that bashing landlords will only make the problem worse, but it’s not a zero-sum game. There are policies we could advocate that would benefit both landlords and renters.
For this, we need to go back to the basics. What makes for a happy renter? As someone who has only recently bought my first house after years of renting, I would venture that the most important ingredient is stability. Firstly, stability of price: when rent climbs faster than inflation, renters go backwards, and unlike interest rates, rent doesn’t come back down. How can a family be secure in their financial future when they don’t know how high their rent will be next year let alone in 5 or 10 years time? It’s not only the high prices that make renters unhappy – it is also the volatility in prices. A happy renter is one who can be confident that the rent they pay today will be about the same as what they pay next year or next decade when adjusted for inflation. Secondly, stability of place: renters want to be good neighbours. They want to feel like they can put down roots and be part of a community. They want a sense of ownership over their space, the opportunity to improve it and personalise it.
The answer is surprisingly simple: long-term leases for tenants and long-term fixed interest loans for investors. The benefits of 5 or 10 year leases for tenants are well established, and in places like Germany many renters feel like renting is just as good as owning a home. They can grow a garden, paint a wall or even invest in some major improvements to the house because they know they’ll enjoy the benefits for years to come.
This arrangement is not only good for renters – landlords also benefit when tenants have a sense of ownership and an incentive to take better care of their home. Because they have access to long-term, fixed-interest loans, they have a guaranteed return on their investment and are not at the mercy of short-term interest rates and the need to pass on rate rises as rent increases just to make ends meet. Both their income stream and their expenses are more stable and this makes for a more financially sound investment.
To achieve this kind of system, we would need to correct a market failure in the Australian banking sector, namely the absence of long-term fixed-interest loans. This is not my field of expertise but if the USA, UK and Germany have them I reckon we can find a way.
Secondly, we need to provide strong incentives for landlords to offer long-term leases. Some kind of tax concession, perhaps exemption from land tax.
Finally, we need to change the way that landlords make a return from their investment because the current system is not only deeply flawed, it is immoral. In the current environment, investors don’t make money from rent, only capital gains, and they are strongly incentivised to do so by negative gearing and the capital gains tax discount. But few stop to think what this really means: for their investment to be profitable in the long term, the capital gains need to exceed both the annual losses AND inflation, and the only way this can happen, long term, is if rent also rises faster than inflation. As I noted previously, rent rising faster than inflation literally makes renters poorer. That is why the system is immoral - just like it would be immoral to buy up the water supply of a town in the hope that the price of water will go up.
Don’t get me wrong, I believe in capitalism. I believe that profit is a good thing when it comes from delivering a product or service to a customer. I also believe property investment can be profitable without being the government-underwritten Ponzi scheme it has become.
In an ideal future, property would be a low-risk, low-growth investment, with a return that modestly outperforms bonds. Landlords would have access to long-term, fixed interest loans and they would offer long-term leases to their tenants with rent increases baked in. In this way, both investors and renters will be shielded from the volatility of interest rates. The forces of demand and supply will still operate, price rises will encourage new supply, but at a more gradual pace - not the boom-and-bust cycles we’ve become accustomed to. This will be better for our whole economy.
The sad reality is that the old Australian dream is as good as dead for many renters. Rather than trying to reanimate its corpse with infusions of household debt, perhaps we should be imagining a new Australian dream where renting a home is just as good as owning one.