The truth about ‘greedy landlords’

Who are these “greedy landlords” squeezing ever-high rents from struggling tenants? I want to dispel some myths that are gathering pace in the Australian market?

First, the “feudal landlord” portrait; unsympathetic, greedy and exploitative. The word “landlord”, by the way, is not one I use. It is a somewhat medieval term and no longer applies to the diverse range of individuals who seek to create wealth in order to self-fund their retirements with a legitimate investment strategy.

Far from rich, tax office figures show that 80% of investors who negatively gear a property have a taxable income of less than $70,000 a year, half of them earn under $58,000, and about 35% of all residential property investors hold positively geared property.

So what of these accusations? Perhaps we need to ask why rental yields are rising. It’s chiefly to do with record low supply and rising interest rates rather than a case of investor greed. That said, there will always be those who capitalise unfairly from already favourable circumstances.

It is quite a rare phenomenon, in any property cycle, for investors to be able to raise rental yields to the levels they are reaching now. Isn’t that a reasonable case of making hay while the sun shines? Or is it a case of lower-income, “mum and dad” investors facing the same interest rate pain as many other property owners and using the benefit of higher yields to help them hold their properties for the long term?

Moreover, we have seen some very strong capital growth in certain sectors of the market at the same time. It is quite a rare phenomenon to see such strong capital growth in parallel with rising rental yields. Therefore, to the outside observer it appears to be a case of property investors having two bites of the cherry.

This was the powerful attraction that saw a record number of investors enter the market in 2007 and borrow a record amount, particularly for established property, according to the Australian Bureau of Statistics. Ironically, without this influx, supply of rental stocks would be even more parlous and tenants more besieged, especially given that prior to the current cycle, investors had experienced four to five years of relatively stagnant rental yields. Many stayed out of the property investment market during that time.

Rent levels are not like petrol prices, they can’t just be universally bumped up overnight. It is common for rental leases to run for 12 months and they don’t all expire at the same time.

But, as they have progressively rolled over, particularly in the past two years, we have seen the onset of “rental stress”. It can take more than a 12 month period for any clear rent rise pattern to emerge. And, because of this long lag time, we are likely to see further rental price spikes showing up over the next few years as well, so the rental increases may not have peaked.

In the current market, rentals are about 3% to 4% of capital value in the established inner-urban national rental market. But it is when investors increase yields to a higher level – just because they can – that we start to see the “greed perception” coming into focus.

The new Rudd Government is launching a range of initiatives to alleviate the “rental crisis” but it is highly unlikely the Government will tamper with the incentives that keep investors in the market – mainly negative gearing provisions – in such a tight supply situation.

Nor can the Government turn a “blind eye” to the fact that so many of our property investors themselves earn relatively modest incomes and are vulnerable to economic market forces … and even more so without their assets.

It would be naïve to suggest that there aren’t some investors who will exploit the current situation as hard and as fast as they can for short-term gains, particularly if their assets are more speculative or based solely on rental yield at the expense of capital growth.

Whilst there are already strong regulations in place at state level that do provide consumer protection in regard to rental levels, leases and basic standards of accommodation, I would be happy to see these provisions more strongly enforced to ensure rental service standards remain high, not only for investors, but for all tenants as well.

This story first appeared in the Eureka Report