A nation of landlords and renters

If more than half of new property loans are going to investors then we are facing a fundamental shift in the residential market.

The ramifications will be widespread; rather than a nation of homeowners we will follow nearly every other western economy and become a nation of renters.

More power will ebb away from the landlord to the tenant as the rental market grows. Those landlords who are in it for the quick flip-over – and subsequent capital gain – will find themselves caught in no man’s land when prices stop going up.

These ‘investors’ were never in it for the yield and as returns gets harder to achieve some will go broke. They should be termed property ‘speculators.’

We are already seeing the market break into various segments responding to demand, including short-stay professional accommodation, student rentals, migrant housing and young families who may or may not still be saving for a home loan.

There’s also evidence of the next generation of home buyers are loosing interest, seeing property as a dead asset because of the high costs involved. The casualisation of their careers is another factor behind their apathy as they become much more global in their outlook.

Another group not in the market for a home yet is the boomerang kids who have returned to the family home to try and save for a home loan while their parents subsidise their living expenses. The Reserve Bank highlighted this trend this week pointing out it was another distortion created by the hot property market as one generation transferred their wealth to another without any beneficial lift in economic activity

What we’re not seeing is longer-term leases of five or ten years or even longer as they have in Europe. That’s because it’s not in the landlord’s interest to do so. They see prices going up and rentals going up with them.

Rent will only rise above inflation when demand exceeds supply. The construction industry sees that lasting perhaps another couple of years if interest rates don’t rise and kill the market.

The longer-term rental is coming because landlords will want to lock in yield in the future with good quality tenants. Technology will help landlord’s rate tenants and vice a versa. Short-term bonds so abused by landlords will be a thing of the past to be replaced longer-term contracts.

In Europe renting is accepted as a fact of life for many and strong tenancy laws make the market affordable and stable.

In the UK there have been recent proposals to give more power over to tenants.

These included five-year contracts, which included:

*Giving renters five years in their home during which they could not be evicted without a good reason.

*Allowing landlords to increase rents annually by a maximum of CPI during the five years.

*Giving renters the chance to decorate their home as long as they return it to neutral afterwards.

*Allow renters to give two months’ notice to end the tenancy.

*Give landlords the right to end the tenancy if they sell the property.

Most of this proposals are ‘foreign’ to the Australian property market with some states allowing landlords to lift rents every six to twelve months by as much as they can get away with.

But with the property boom changing the balance between owner occupier and the investor in market, the balance between landlords and tenants also has to change.

It may still take some time but Australia’s newly-minted landlords need to make sure there’s enough tenants to go around when it happens.

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