Are rental reforms truly deterring investors?

There have been plenty of recent claims that rental reforms—introduced by state governments to give tenants more certainty—are a massive disincentive to property investors.

Property industry lobby groups claim that recent reforms by Victoria, Queensland, South Australia, and the Australian Capital Territory, along with the proposed changes in New South Wales, are making many landlords sell up, meaning there are even fewer properties available for rent at a time of record demand.

But do the claims actually stack up?

The accusation

The recent announcement by Premier Chris Minns to ban on no-grounds evictions in New South Wales from next year has provoked howls of protest.

Currently, landlords in that state are permitted to end a periodic lease at any time, provided they give the tenant 90 days’ notice.

Tenant groups claim greedy landlords have misused this right, evicting perfectly good tenants and then offering the same property for lease, confident they’ll be able to secure a much higher rent in the midst of a housing crisis.

The proposed changes mean tenants can still be evicted if:

• There’s a breach of lease by the tenant, including property damage and failure to pay rent.
• The property is put up for sale
• Significant repairs or renovations are needed
• There’s a change of use
• The owner intends to move into the property
• If the renter is no longer eligible for schemes like affordable housing programs 

“Bad tenants will still be able to be evicted,” according to Chris Minns

But he told the recent New South Wales Labor Party conference that “this will give both homeowners and renters more certainty, more peace of mind, so they can build a home and a life on surer ground.”

Tim McKibbin, the Chief Executive of the Real Estate Institute of New South Wales, has accused the Premier of planning to remove “a landlord’s right to recover possession of their property.”

He claims it’s “clearly a politically populist ploy to appeal to tenants” and says it “will have an immediate and negative impact on a rental market already in crisis.”

Mr Mckibbin points to recent dwelling figures, which showed that home approvals were down almost 19% in NSW in June. 

“Also in June, the number of properties rented in the state decreased by 1,251.” 

“In July, this number decreased by a further 1,362, Rental Bonds Board figures show,” he says.

“Yet over the same two-month period, through immigration alone, more than 30,000 new people arrived in NSW in need of somewhere to live.”

“To summarise this unfolding catastrophe, new housing supply is going backwards, there are fewer properties to rent, and a lot more people to house.”

The evidence

In a recent study called “Does tenancy reform ‘spook’ investors?”, CoreLogic Australia’s Head of Research Eliza Owen concluded that “The supply of rental property seems largely influenced by access to finance and capital growth return” and that dynamics “still seem overwhelmingly driven by broader economic and demographic factors of supply and demand, rather than tweaks to tenancy laws.”

To back this up, she shared the chart above, which appears to show that total property investor lending in Australia has much more to do with easy access to finance at attractive rates rather than any rental reforms. 

And as she notes, “Investor lending declines when housing market returns are low.”

“Ah yes”, I hear you say, “but aren’t investors just pulling their existing capital out of states seen as unfriendly to tenants and investing it in other parts of the country?”

Not necessarily.

“Stronger capital growth markets by state and territory have also seen more resilience in investor activity, despite rental reforms,” Eliza Owen points out.

She cites the example of South Australia, where a ban on ‘no grounds’ evictions and other rent reforms have just taken effect.

“Since these reforms were announced in July last year, new investment property finance has only trended higher and is up around 37% as of May 2024.”

She notes investment activity in the ACT has dwindled since the announcement of a ban on ‘no grounds’ evictions in April 2023 but says, “This could also be due to the fact that capital gains in the Territory have been relatively weak in the period, and there are some indications this market is slightly over-supplied.”

While Western Australia remains one of only two jurisdictions in the country where there aren’t  laws or plans to ban “no-grounds” evictions, CoreLogic’s Eliza Owen says, “it is hard to tease out the effect of more flexible landlord arrangements from other market conditions, like unusually strong population growth or the highest annual capital growth rate of the states and territories.”

Ms Owen points out that WA’s “added flexibility for landlords was not enough to entice investors into the low-growth conditions of the late 2010s.”

While Tim McKibbin from REINSW is pronouncing the last rites for property investors in New South Wales, the chart below shows that investor lending in the state is strong and still growing.

While it's true dwelling approvals in New South Wales are down, this could also have a lot to do with affordability constraints in Australia’s most expensive property market at a time of continuing high interest rates.

In terms of the number of properties being rented dropping, this could also be a symptom of affordability constraints for tenants, especially in Sydney.

New figures from economist Stephen Wu at the Commonwealth Bank show that as rents have continued to soar, more people are choosing to live in sharehouses or with relatives to save money.

It’s reversing a Covid-era trend which saw household sizes shrink. 

Now, the current share of people living in sharehouses is just below 5% of the population, according to CBA, a jump of about 1% or 200,000 people since 2021.

Meanwhile, a survey by the comparison website Finder found that nearly one in five Australians had lived with an ex-partner after a break-up due to housing affordability concerns.

4%, or the equivalent of 800,000 Australians, are currently living with their ex.