Balancing tenure security and mobility for productivity

Yesterday we submitted our thoughts in response to the NSW Productivity Commission discussion paper "Kickstarting the productivity conversation". We recommended a shift to land tax, for a more reliable property tax system that encourages better land use, and exploration of a different way to encourage meaningful supply with positive outcomes. The rest of this blog is an excerpt, exploring some different conceptions of tenancy regulation. I intend to provoke discussion, rather than this be the last word.

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What is the most efficient mix of planning, regulatory and tax settings to deliver outcomes that get the balance right between tenure security and housing mobility?

We examine this issue chiefly from the perspective of the tenant-landlord relationship, which may be expressed differently in different types of rental housing. The correct balance between tenure security and housing mobility is to ensure that a housing consumer (tenant) is free to change providers (landlord) when they perceive that there is economic opportunity for them to move, or when they can express their consumer choice to take up a better offer in the market. However, their tenure security needs to be protected because of the particular nature of the service being offered. This is best done by ensuring the provider cannot withdraw the housing service without transparency as to their decision-making.

We note the Discussion Paper includes a calculation from NSW Treasury concerning the direct costs to consumer, at $115million per year over 23,000 tenants formally required to vacate their homes. We also encourage consideration and further examination of the indirect costs.

We note that:

•     56% of NSW rental properties are in need of some repair, the highest proportion in Australia. As well as tenants living in poorly maintained homes with social costs attached, this means that NSW tradespeople are missing out on work. This requires further examination, but as a preliminary calculation if we assume a very small average of cost of $220 per item at least $100m worth of contracts are being missed. This alone could provide employment in the state for more than 1000 tradespeople.
•     Tenants are more likely to have casual work on weekends with lost economic productivity associated with finding and moving homes as frequently as they do.
•     Unaffordable and insecure housing is causing greater travel commutes resulting in reduced recreation time with associated health impacts; and reduced time to engage in community life with a range of flow-on impacts.

There are two fundamental errors that have been made in the approach to regulating the residential leasing sector for many years.

The first is that landlords, in their role as a service provider, have neither conceived of themselves, nor have been regulated as if, they are in business. A hairdresser must show they are a qualified hairdresser who either holds a trade qualification, or has been approved by a industry panel. The only barrier to entry for a landlord has been the price of the property.

In upcoming amendments to the Residential Tenancies Act 2010, landlords will now promise to have read a brief landlord information statement. This is akin to requiring a hairdresser to watch a Youtube video – it does not guarantee they have understood the content, or are able to implement it. But while a bad haircut can be embarrassing, a poorly maintained, insecure home has serious ramifications for its consumer.

Regulators have assumed that the role of the real estate agent is to ameliorate this lack of business-like behaviour, in the same way that the owner of a company does not need to know how the machinery that their workers use actually operates – it is actually the employees who perform the role. The owner’s role is merely to provide the capital. However this has not created a private rental sector which delivers on its role of providing stable, affordable and well-maintained homes.

This is largely because real estate agents are not empowered to perform the role expected of them by regulators. While agents have a professional statutory obligation to know the law, they cannot force their landlord to comply with that law, and risk their own business if they place too much pressure on their landlord. Further, roughly a third of landlords reported to the Census that they do not use a real estate agent to manage the property.

Second is that regulators have taken an approach that assumes that the two parties to a tenancy contract have come to that contract as equal parties. Upon inspection, this regulatory approach is clearly flawed – one party is approaching the contract as an investor seeking to maximise their return. The other is attempting to find a roof over their head. These are not complementary interests, to be treated as two sides of the same coin.

The proper conception of the interaction between housing consumer and housing provider is that it is the provision of an essential service. This fits in conceptions of housing being a basic need to be met, like food and fresh water. Unlike food, where supply is relatively abundant and mobile, housing is more similar to other essential services like energy and water which require significant immobile infrastructure to support their delivery. We do note that food, unlike housing, has enforced safety standards to prevent harm from coming to consumers. Like these other essential services, it should be seen as inappropriate to cut off a person’s access to the essential service of housing where they are complying with the terms of their consumer contract.

Where ending the housing consumer’s use of the premises is regarded as necessary for the reconfiguration of the housing provider’s business model (such as converting use either from rental to owner-occupied or from residential to commercial use, or significant renovations) then it is appropriate for this to be done in a transparent way, and with recourse to arbitration to ensure that the person is being treated fairly.

However, this flexibility is undermined by the current practice of allowing unfair withdrawal of the housing service. This would ensure greater quality of service provision, by ensuring a more equal balancing of market participants' incentives.

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We made three recommendations on these points:

1. NSW government should move to remove no grounds evictions, and replace them with an expanded list of reasonable grounds that may include substantial renovation, or shifting from a rented accommodation to an owner-occupied. What is important is that the grounds should be aimed at situations where the property itself is no longer going to be available to function as a home for rent (for some significant time period).
2. NSW government should also seriously consider implementing a regulatory framework to ensure landlords are
   viable, either by requiring proof of sufficient cash reserves for possible maintenance obligations, or through lodgment of a landlord bond (which, like the tenants’ bond, would act to ensure they are able to uphold their obligations under the tenancy contract); and
   professional, by requiring education by a registered training organisation that ensures they are aware of their obligations under the Residential Tenancies Act 2010 and are able to perform those obligations.
3. If Recommendation 1 is not implemented, build-to-rent projects that receive incentives such as tax relief or relaxed planning rules, have clear standards for levels of affordability and stability. In relation to stability, by forgoing the use of no-grounds evictions, there are a number of mechanisms that could be activated, whether planning control, application for relief from land tax after evidence of compliance collected, or through legislative reform.