The moral of the storey

We’re all thankful for the RBA’s recent 1% cut in the cash rate. Hopefully it will help Australia avoid a recession. However, it seems that the Tenants Union of Victoria is trying to leverage this into improvements in rents for their members, using the argument of ethics. The claim is that landlords are morally obliged to reduce rents when their costs fall.

I am sympathetic to the plight of renters: I have been one for most of the time I’ve lived out of home, and it is possible I will be one again in the future. However, I am also a landlord and I speak from experience when I say that the price of rents is generally unrelated to the level of interest rates. The current rental crisis is more due to population pressures driving a level of demand beyond that of the existing supply. Market forces set rents, not the mercenary nature of landlords.

Over the last decade, up until the last two years, I have had to keep my rents more or less static, despite rising interest rates, since it was a renter’s market, and market forces meant I had to wear the increase in costs. In the last couple of years, it has swung around and it’s more of a landlord’s market in Melbourne (although less so than 12 months ago), so rents rose in line with demand. When more apartments are built, supply will increase, and things will balance out again. I know, this isn’t helpful to those renting today, but housing is a long term proposition. People renting can get a house of higher quality than if they bought, as they are paying off a historical mortgage (i.e. when the house was cheaper) rather than a current mortgage (assuming house prices have risen).

Another flaw to the proposition by the Tenants Union of Victoria is that if you extend their argument to its logical conclusion – that rents should be set at a fixed margin above costs – then you get absurd outcomes. For example, rents would be cheaper on properties where the owner had paid off more of their mortgage, and almost free when there was no mortgage left at all.

However, there are some ethically grey practices by landlords around rents that do deserve scrutiny and complaint. I am thinking here of when a property is advertised at a particular weekly rent but then the landlord expects prospective tenants to offer to pay above that level of rent, or selects tenants for the property based on offers of above-advertised rental payments. The issues here are transparency and fairness: all tenants should be given equal opportunity to apply for a property. If landlords wish to receive higher rent, then they simply need to advertise their property at that level of rent. There is no need for secret, above-advertised payments.

But even with such dodgey practices in the market, overall rents will respond to market forces. It’s simple supply and demand. No matter what the Tenants Union of Victoria demands.

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