Are landlords the bad guys?

In my first post in this series on the economic fallout of covid-19, I asked whether banks are the heroes of our current economy. The answer was a resounding no. But now, as thousands across Australia are losing income, either from reduced hours, a decrease in business, or even a complete loss of employment, many are now struggling to afford the basics. Including rent. As a result, many have turned their attention to landlords.

The Prime Minister has announced a six-month moratorium on commercial and residential evictions, with renters encouraged to contact their landlords or real estate agents if they’re facing financial hardship as a result of the coronavirus shutdown.

But (surprise!) it seems that simply expecting tenants and landlords to work it out themselves isn’t working.

Stuck in the middle with you

In recent days, I’ve seen numerous renters on Reddit posting about their landlords’ refusal to play ball. Some are reportedly demanding rents be paid in full even when tenants have suffered significant financial losses.

On the other hand, in spite of the eviction moratorium designed to protect tenants (which may differ in its application from state to state), and the drastic increases in financial help now available in the form of the recently doubled JobSeeker payments, and the newly introduced JobKeeper income support, thousands of renters have pledged to undertake a ‘rent strike’.

Caught in the middle of it all are real estate agents, who, the Sydney Morning Herald reports are being “abused by people who are in desperate situations”.

The situation is indeed desperate. But are landlords really the bad guys here?

Prefer to listen to this post? Here’s the podcast version:

What does a property investor look like?

As I outlined in a previous post on the Covid-19 crisis, it’s easy to have a pretty inflated impression of what a property investor looks like. But the vast majority of property investors aren’t wealthy fat cats with multiple properties under their belt.

Close to 8% of Australians own investment properties, or one in every 12 people, and of that figure, 73% own just a single property. The next largest group of investors, at 18%, own two properties.

We’re not talking about the ‘richest of the rich’ here. The 1% vs. the 99%. While, undoubtedly, some property investors are immensely wealthy people, the majority are not – and in fact, many have enormous debts.

The typical property investor is an ordinary Australian. The kind of people often call ‘mum and dad investors’. Someone who owns one property. Usually with a mortgage of their own. One they won’t be able to pay if they don’t get any rent.

Many property investors don’t even own their own homes. Many young people who live in disproportionately expensive cities like Melbourne and Sydney, unable to live in the cities they work in otherwise, have purchased a modest home in another area in order to get their foot on the first rung of the ‘property ladder’, and to be able to afford the rent where they live.

The vast majority of investors who will be hurt by a strike on rents, and by the Covid-19 crisis more broadly, are the ‘little guys’, or, at best, the ‘medium-size guys’.

The ‘little guys’ vs. the true big guys

The vast majority of property investors – around 91% – own just one or two properties. While, to someone who has been struggling to break into the property market, that might seem like a lot, like most areas of the economy, there is a long, long tail.

Of the 8% of investors that remain, 5.5% (or under half a percent of all Australians) own three properties. Two percent of investors (or around 0.15% of all Australians) own four properties. And less than one percent (or fewer than one tenth of one percent of all Australians) own five or six or more properties respectively.

That bears reiterating: 91% of investors own just 1 or 2 properties, while fewer than one percent have 5 or 6 (or more).

What are the banks doing?

Banks have offered mortgage holders the ability to ‘pause’ their mortgages – but as we’ve seen in previous posts, when they continue to charge interest, this inevitably results in the borrowers getting deeper in debt than they were at the beginning.

Some landlords may even end up with an underwater mortgage, leaving them open to the possibility of their house becoming repossessed. And while the government has put a moratorium in place to ensure landlords don’t kick out renters who can’t pay their rent, what will happen when landlords can’t pay the banks, and they owe more than their house or apartment is worth?

What is the government doing?

Governments in some states like Victoria and New South Wales are expected to give landlords a reduction in their land tax, in order to make up for the loss of rental income.

But a reduction in taxation only helps those landlords who have a large number of expensive properties. Those at the top end of the tree.

Land tax

Land tax is calculated based on the total value of your taxable land above the land tax threshold, and doesn’t include your principal place of residence.

In 2020, the threshold in Victoria is $250,000.

In NSW, it’s $734,000.

Remember, this is for the value of the land alone, not the improved value (including the house or apartment or whatever).

Who pays land tax?

The land value of a big house can be quite a large proportion of the total value. But for an inner city apartment in the likes of Sydney or Melbourne, where apartments have a small footprint and the value of the land is shared with all the apartments above and below, the land value can be a very small portion of a property’s value indeed.

Meaning that many of those landlords who own just one or two properties – modest flats, not great big sprawling houses in leafy suburbs – aren’t eligible for any relief in the form of tax reductions because they simply don’t own enough property to have to pay land tax in the first place.

What’s more, this type of arrangement only encourages the very sort of property investing that most renters who want to be homeowners are against: that is, the sort which is driven by negative gearing and tax effectiveness.

Who are you fighting for?
(And who are you fighting against?)

A recent SBS News report profiles the highly photogenic campaign pulled together by a pair of Sydney filmmakers who have pledged to stop paying their landlord this month, characterising their protest as not just about them, but “our entire society”:

“When we asked the real estate agent for a rent reduction, he answered immediately, ‘it’s business as usual’.”

‘Business as usual’?

Photographed in bed, naked but for a sheet, along with her partner and small daughter, their mouths duct-taped shut, and their daughter holding up a hand-stencilled sign, Ms. Ayala continued “People are losing their lives and livelihoods, we can’t see our loved ones, our five-year-old doesn’t go to school and the real estate agent says it’s business as usual?”

Ms Ayala is right. It’s not “business as usual”. We are, in many respects, in a whole new world.

But we have to ask the question:

How is housing different?

Why is it that not only residential renters, like Violeta Ayala and her partner, Daniel Fallshaw, but big companies, like shopping centres and Bupa (which made a profit of $564 million last year alone) are striking on rent, but not refusing to make other payments?

Can you imagine the government suddenly mandating that all bookstores and art galleries must, for a six month period, allow people to take whatever they like without paying?

Can you imagine a pair of Sydney filmmakers refusing to pay for their Netflix subscription – and expecting it to remain switched on?

Can you imagine 17,000 people signing a petition alerting music festival organisers that they intend to go and crash an event without paying?

I don’t think so.

Of course, books and art and Netflix shows and music festival tickets are luxuries, not necessities.

The dozens of renters who sent a letter to their Yarra Council landlords in Melbourne on March 31 say “We believe housing is a right”.

I believe housing is a right, too.

Along with food, and clothing.

In fact, food is more essential than housing.

But can you imagine the government suddenly mandating that restaurants and grocery stores will be, for a six-month period, not only obliged to serve ‘customers’ who can no longer afford to pay for their meals, but that they must not decide to shut up the kitchen and close?

Can you imagine a pair of Sydney filmmakers photographing themselves refusing to pay for their trolley at the local grocers, complete with protest signs and duct tape?

Can you imagine 17,000 people signing a petition alerting store owners to the fact that they intend to steal margarine and avocados and Weetbix and wholegrain pasta?

No. It doesn’t sound likely.

I’m not saying that shoplifting doesn’t happen.

What I’m saying is that it doesn’t happen so brazenly, and it certainly doesn’t happen as a result of people taking a moral stance.

Multimillionaire evil Scrooge McDucks

As one Melbourne landlord, Mr. Bassem Abousaid, quoted in the SBS article notes, landlords are being characterised as multimillionaire evil ‘Scrooge McDuck’ types.

And I think that’s the difference.

It’s easy for us to imagine that landlords are these big Mr. Monopoly types, sitting pretty on a stack of cash, when in reality, the majority own just a single property.

Landlords are people, too

Many landlords, just like everyone else at the moment, are worried about how they’re going to pay their bills. How they’ll cover the cost of maintenance, repairs, water supply, fire levies, insurance, rental management, inspections, fire compliance inspections, replacements, mortgage payments, and the many other costs associated with owning a property – most of which are legal obligations and not something owners can simply decide to cut back on. Where they can cut back (on repairs and improvements) it is the tenants who end up suffering.

Many retirees rely on rent to put food on their table, electricity in their heaters, or water in their pipes. Many younger landlords, as I mentioned above, also rely on rent from the property they own to be able to afford the rent for the place they live in, or for other day-to-day expenses.

Full disclosure: I am one such landlord. I do have a vested interest in making you believe that landlords aren’t all bad people. And I do genuinely believe that to be the case.

There are good landlords, bad ones… and a lot in between

There are, undoubtedly, some terrible landlords. But there are some wonderful ones, too.

When I was a tenant, we encountered a whole range of landlords – from the extraordinarily lovely, to the decidedly below average.

What do you think of when you think of a ‘landlord’?

As landlords, my husband and I have tried our best to be fair and generous. Every single request for a repair or improvement to the property, we have responded to immediately and positively. When Covid-19 hit, we reduced the rent. The last thing we want is for our tenants to be out on the street. We care deeply about the people who are living in our home, and feel a great responsibility towards them.

But when most of us think of a ‘landlord’ or a ‘property investor’, I think we think of someone quite different to the young(ish!) couple who have rented out their modest flat to travel, or the retirees who are struggling to get by.

Our image of a typical property investor

Long-term Enrichmentality readers may remember an analysis I did of images of ‘investors’.

It’s telling that, when you do a Google image search for ‘landlord’ one of the top refinement options the search engine suggests is ‘evil’. Here are a selection of those ‘evil’ landlords: for the most part, a bunch of mustachioed, top-hatted white guys nailing eviction notices to the wall, counting their stacks or bags of cash, or dangling keys out of reach of tenants.

And this is where we see another key difference between shoplifting and rental strikes:

Who gets hurt the most?

Although shop theft is an enormous issue in Australia, accounting for hundreds of millions of dollars in losses per year, for the most part, thieves target those who can most afford to weather the losses. The smaller your business, statistics suggest, the less likely you are to experience shoplifting. Nobody wants to hurt the lovely couple who runs the milk bar down the road, but the faceless corporate giants are another matter entirely.

With rental strikes, the opposite is true. The smaller your portfolio, the more likely you are to be hurt. To lose income. To go bankrupt.

Meanwhile, the biggest property investors are the most likely to benefit from the current situation. They are the ones who will be eligible for tax relief.

The rich get richer…

The very taxes that are designed to try and encourage a wider distribution of wealth by taxing those who have the most are being waived. And, as homeowners find themselves going under, and smaller landlords do too, the big property investors will be the ones who have the cash to snap up all of the bargain property that will flood the market.

In other words, I believe there is a very real risk that rental strikes could result in a greater concentration of the bulk of the wealth in the hands of the very few.

… and more people become poorer

The only landlords who will be squeezed out by this striking action are the mum-and-dad types who are in the upper middle class at best. And, when they have to give up their property dreams, it won’t be the hard workers and the young couples and the new families who will enjoy a new abundance of affordable property. Many people in this category will have lost their jobs or other income. And even those who have money, and the ability to borrow, will likely want to wait until social distancing rules have been relaxed and they can once again go and inspect a property in person.

But you know who doesn’t care about any of that? Big property investors. They’ll snap it all up without a care, sight unseen, the cost nothing more than numbers on a page to them.

Diversification

There’s another important way in which smaller investors will be hardest hit, and that’s in their lack of diversification.

While the Retail Traders’ Association reports 1.5% of turnover each year goes to “leakage or shrinkage” (which includes not just theft from customers and staff, but damage to goods, fraud and other losses), this loss is spread across all businesses. Bigger companies, like the big box chain stores and supermarkets that are more frequently targeted, might have higher amounts of leakage and shrinkage, e.g. 2%, while the smaller businesses might have, say 0.5%.

But when it comes to rental strikes, individual landlords are at risk of losing literally everything.

Why this is bad for tenants

For the tiny proportion of big-shot landlords – less than 1% – who own six or more properties, having one tenant go on ‘rent strike’ means suffering a loss of at most 17%.

The typical landlord – all 73% of them – who owns just one property, however, will suffer a total loss of income if their single tenant no longer pays rent.

For the big-shot landlord to suffer a comparable loss would require all six of their tenants to stop paying – a much less likely scenario.

And it is these big-shot commercial scale landlords who have the money and legal firepower to take action against tenants and real estate agents who don’t pay up.

Real, sustainable solutions –
a Universal Basic Income

I’ve argued many times in the past for a universal basic income which would make the provision of the essentials, including housing, a right for everyone.

But in order to make real, sustainable change, we need to do so at a societal level, and in a way which brings everyone together, rather than tearing people apart.

As much as the road ahead of us is bumpy, we have an incredible opportunity ahead.

We have the opportunity to create real change in the world.

The failings of neoliberalism and of capitalism more generally are now painfully obvious even to those who, for the longest time, wanted to pretend they didn’t exist.

As I’ve outlined in my previous posts, even those who have played the game by the rules, who have done all of the ‘right’ things, are being caught out this time. This includes tenants, homeowners, and landlords.

Refusing to pay rent indiscriminately is not the answer.

Not only is it unfair to landlords, but more importantly, there is a very real risk it will wind up making the Australian property market even more unfair to tenants and prospective homeowners in future. And that will result in a lot fewer small-time landlords, a lot fewer home owners, and a lot more homes owned by the stereotypical ‘evil’ landlords, twirling their dark moustaches.

Rather than attacking landlords with small portfolios – a short-term solution which will most likely bring long-term pain to the masses – we should be looking at what models have worked well elsewhere. As I’ve written about in the past, Romania, Singapore, and Slovakia all have home ownership rates higher than 90%. China and Cuba also sit at 90%. And Croatia and Lithuania are very close (89.7% and 89.4% respectively). What do these places have in common? A history of communism or socialism.

In other words, greater government involvement. Not being told to ‘work it out among yourselves’ as property advisor Kirk Stafford puts it, an approach which is resulting in rental managers being abused, and both tenants and landlords feeling under immense pressure.

More importantly, the greater concentration of wealth into the hands of a tiny minority, which rental strikes in combination with the current decision-making is likely to achieve, is the exact opposite of the sort of approach which has been successful elsewhere.

If you’re a tenant in trouble, before you go on strike, try talking to your landlord. If they’re anything like me – and statistics say the majority are – they’ll be only too glad to hear from you.

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