Private residential landlords are unfairly demonised

No investor class is more regularly picked on by politicians of the left and by some members of the public than residential landlords. Landlords have become scapegoats for high rents and housing shortages. They are regularly condemned for being "greedy", dodging "their fair share" of tax, wrongly evicting or "exploiting" tenants, not allowing pets, and for renting premises that are allegedly "not up to standard".

While landlords in general are often begrudged, anybody owning more than one or two rentals is subject to even more venomous envy. (One gets the impression that someone who has a lot of rental properties has actually done something wrong!) By contrast, you don't hear the same type or intensity of criticism (often poorly informed) about, for example, those investing in shares, investing in superannuation, owning artworks or collectables, or holding bank deposits.

People talk about the "right" to housing but don't consider who is obligated to provide it. Surely, if there is such a right, this is a community/government obligation, and not something to be borne solely by the minority who rent out residences.

Speaking broadly, there are two inescapable facts facing the rental housing market in Australia. The first is the persistent shortage of rentals in recent years, evidenced by sharply rising rents and low vacancy rates. The second is a failure of the part of the public and community sectors to fulfill their obligations, thus relying on private landlords to make up the big shortfall.

According to the 2021 Census, Australia's housing stock consists of 6.2 million owner occupied dwellings and 4.7 million rented dwellings. Only about 350,000 of the latter (7.5 per cent) are comprised of state housing units, so that, overall, it is overwhelmingly private landlords and not state housing bodies that are putting roofs over people's heads. This is despite the fact that there is supposed to be an internationally recognised "right to adequate housing ". This right to housing is set out in Article 11(1) of the International Covenant on Economic, Social and Cultural Rights (ICESCR).

The estimated total value of Australian residential real estate was $ 11.3 trillion at the end of December 2024, with the privately rented component perhaps $3 trillion. Given current public sector indebtedness, and constraints on federal and state budgets, there is clearly no capacity on the part of government to replace private rentals.

In the face of shortages of rentals, it would seem sensible to incentivise landlords to increase supply. Instead, governments are doing the opposite and are also responsible for much of the increased cost of a new home. Up to half of the cost of a new home now goes in taxes and government charges , and delays in obtaining planning approval have resulted in it often taking longer to gain planning approval than to build the actual house. Publicly funded infrastructure spending sprees have also diverted tradies away from the housing sector, while subsidising first homebuyers merely serves to drive up home prices.

If you take a typical residential rental in a capital city, the rule of thumb is that, on average, the market rent in dollars per week is very roughly the property value expressed in hundreds of thousands of dollars. In other words, a $900,000 property commonly rents for about $900 per week, though there is some variation. This equates with an average gross return of approaching five per cent per annum, which reduces to maybe 2 per cent after deducting running costs, not counting interest.

Put simply, an operating profit of only 2 per cent before tax for a residential rental compares very poorly with an average 3.5 per cent (often fully franked) dividend for Australian shares, and 2.5 to 4 per cent for bank term deposits. For this reason, institutional and corporate investors generally steer clear of residential property, preferring higher returning commercial or industrial investments.

Also, contrary to popular myth, there is little scope for landlords or their agents to hike rents above market levels. Excessive rents are a mistake because an overpriced rental simply risks remaining vacant or attracting only bad tenants.

But what about capital gain, you might say? While there were strong nominal capital gains in some past years (particularly when COVID-related low interest rates prevailed, and in earlier years when inflation was running at a high rate), assets like shares have also experienced strong price gains. Given the current general unaffordability of housing and falling inflation, the scope for further hikes in housing prices is limited unless there are big falls in interest rates, big rises in wages, or rapid inflation returns, all of which seem unlikely.

The transaction costs for dwelling purchases are particularly high but are very low for shares and most other assets. When buying a dwelling, the stamp duty can sometimes reach 5 per cent of the purchase price. When selling, agents fees can range from about 1.5 to 4 per cent. Home buyers (including investors) generally also pay between $1,500 and $2,500 in conveyancing costs, while sellers might face typical costs of between $2,000 and $3,000.

The bottom line is that the first 8 per cent or so of any nominal capital gain on a property sale simply recovers transaction costs, whereas the transactions cost on most other forms of investments (especially shares) is next to nothing.

In addition to buying and selling costs, there are a lot of special imposts on landlords:

• Investors are generally slugged an extra 0.5 per cent p.a. in interest over and above the rate charged to owner-occupier borrowers. For investor borrowers, this can amount to thousands of dollars annually depending on loan size.
•  In many jurisdictions small flats (mostly owned by investors) are charged almost the same council rates as bigger units, despite having lower valuations and fewer occupants.
• In turn, units (favoured by investors) commonly pay disproportionately high council rates relative to larger (mainly owner-occupied) houses with more residents.
• Many councils, especially in Queensland and WA, now apply a "differential rates policy". In essence, they charge higher rates for a given property, if it is owned by an investor
• Then there is land tax on rental properties. It is not a coincidence that the ACT, which historically has had the most savage land tax, - up to 1.26 per cent of residential land value and no tax-free threshold at all, also has some of the country's highest rents.
• Victoria in 2024 notoriously increased its land tax rates up to a maximum of 2.65 per cent and reduced the tax-free land tax threshold to $50,000 and is now considered to have the highest land tax in the country. The Northern Territory is the only jurisdiction not to charge land tax.
• Queensland in 2022 (unsuccessfully) sought to tax landlords based on their total Australian land holdings, not just those owned in Queensland. The measure got shelved because other state governments refused to cooperate.
• Many state governments have increased investor land tax rates, with larger increases for overseas investors and owners leaving properties vacant.
• Changes to income tax law have also penalised landlords. From 1 July 2017 property investors could no longer claim travel expenses incurred while inspecting, maintaining or collecting rent from rental properties.
• From 1 July 2017, new rules also abolished deductions for second-hand depreciating assets in residential rental property, so that landlords now generally cannot claim a deduction for what is a real and genuine cost.
• State and territory governments of all varieties have failed to rein-in stamp duty charges on property transfers (except in the case of concessions for first home buyers). In NSW, for example, the first three stamp duty thresholds for properties are $17,000, $36,000 and $97,000. What can you buy at such prices these days? Most houses now attract stamp duty rates of 4.5 to 5.5 per cent at the margin due to bracket creep.
• State and territory governments have also legislated a list of standards that rented premises must comply with. The long list, which varies by jurisdiction, include smoke alarms, electrical safety, gas safety, swimming pool safety, etc. The compliance costs (including safety certificates) are borne by landlords and eventually get passed on to tenants.
• Overall, landlords pay a much higher level of taxes and charges than most people realise.

State governments, especially Labor state governments, have also made life difficult for property investors in other ways. Arguably the balance of tenancy laws has been shifted unreasonably in favour of tenant protection, despite bad tenants often costing landlords large amounts of money.

It has become increasingly difficult and time consuming for landlords to remove bad tenants (e.g. those who don't pay their rent, damage the property, engage in anti-social behaviour). Several states and territories have moved to also force landlords to accept pets (potential damage by dogs being the big issue) with many states also banning "no grounds evictions", when leases expire.

From May 2025, NSW tenants will be able to apply to keep a pet in their rental home, with owners only able to refuse for specific reasons, such as the owner living at the property or failure to comply with local council laws. Owners will now also be required to provide a valid reason to end all lease types. Longer notice periods will apply for some leases. On the other hand, renters who find a new property after receiving an eviction notice will have improved rights to end a lease early.

Almost all these "reforms" brought in by state Labor governments tilt the balance unreasonably in favour of tenants.

The biggest problem faced by landlords is that rental bonds (generally capped at four weeks rent) regularly prove inadequate to cover rental arrears and damage by bad tenants. Problem tenants, who cause damage, often stop paying rent and can end up running up many weeks of arrears.

It can be very difficult to evict a problem tenant, who may continue to cause damage. In state tenancy tribunals it is not uncommon for landlords to encounter members, who are very sympathetic to errant tenants. Landlords and their agents are responding by becoming increasingly careful about who they let into a property.

It can take weeks to obtain a tribunal or court hearing. The process involves significant costs and awards may leave landlords substantially out of pocket. For example, tribunals are generally reluctant to order tenants, who break their leases, to pay more than four weeks rent. (A property vacated before Christmas can take until the end of January to re-let. It will take much longer if tradies are needed to fix damage.) In any case, offending tenants often abscond or have little means.

I have personally had bad experiences with dogs in my rentals.

On one occasion I gave permission for a (high-income executive) tenant to keep a "stay outside" dog. (I have learnt through experience that such conditions are very difficult to monitor or enforce.) The dog subsequently caused $6000 worth of damage to the polished hardwood floors inside the large residence. On another occasion a tenant kept more than the single dog approved, and the dogs dug holes all about the garden. Cats are less destructive but on one occasion the single approved cat grew to about nine or ten because the tenant took in strays. Another tenant kept an unapproved dog in a second-floor unit.

The boyfriends and relatives of tenants are a rarely spoken about issue. I recall one otherwise good tenant, who had a boyfriend who caused damage to the property and was eventually charged with the murder of her infant. Unapproved additional residents are another significant issue, but their existence and number can be hard to prove.

Some tenants do stupid things. One tenant was distracted by a phone call while frying chips. When she discovered the chip pan on fire, she threw water on it, making matters much worse. The damage bill (mostly the effects of smoke) was $20,000. The tenant stopped paying rent and subsequently "did a runner", when she found out that she could be held liable.

Most landlords value "forever tenants" and provide them with a modest discount to the market because of the savings in lease fees and vacancy costs. In my opinion, bans on "no grounds evictions" mainly protect bad tenants.

The by-product of much of the recent government intervention is that it has become a lot more expensive and a lot less desirable for investors to buy homes for rent. If the trend of "landlord-bashing" by government continues, investors will simply walk away from the rental housing market and put their money elsewhere.

If and when this happens, the rental crisis will further worsen. Landlords already are noticeably starting to vote with their feet in Victoria.