NSW tenancy reforms put the heat on both tenants and landlords

President of the Property Owners Association of NSW John Gilmovich explains the new reforms, what they will mean for the market, and why they have the potential to put more pressure on housing and rents.

If you didn’t know already, the NSW Residential Tenancy Act and Regulations were updated and passed through parliament unopposed on 19 December, 2019.

The new laws, proposed by the State Government Innovation and Better Regulation office begin on 23 March, 2020, were aimed at providing an improved residential tenancy system. But will it achieve that?

Only time will tell, but there’s already much confusion and concern around some of the new clauses.

Many stakeholders are shaking their heads at what they foresee as testing times ahead, with the overload of regulation and red tape within tenancy and the management of that asset class.

The rental reform package released to key stakeholders only four years ago fought for a sensible and balanced approach by the rental provider community under “cabinet in confidence” privileges.

Tenancy lobbyists consulted government bureaucrats over those four years with multiple round table meetings and written submissions to bring about changes that will affect the way tenancies are created and managed.

Despite these countless meetings, the government only listened to some, but not all, of the lobbying efforts.  If you haven’t already noticed, rental reforms are occurring right around the country.

Our three largest cities have now had their tenancies laws placed under the microscope with Victoria passing theirs in 2018 and Queensland just about to.

More states are on the way to reform and all are aligned and on par with similar visions – that is, to give more power and certainty to tenants. Naturally, this was not met with arms wide open. Not all received what they wanted, and I’m sure lobbying efforts will continue for some time to come.

So, what’s in the NSW reforms? 

Some of the bigger changes include:

  • Rent increases must be limited to once per year during a periodic agreement when the fixed term has passed.
  • Landlords must obtain tenants’ prior written consent to publish photographs or video recordings of premises.
  • Tenants may make minor alterations, fixtures, additions and renovations with the landlord’s consent, but the landlord cannot unreasonably withhold.
  • Repairs and replacements of hardwired smoke alarms must be carried out by an authorised electrician within two working days and are no longer a tenant responsibility.
  • NSW Fair Trading will have the power to issue property rectification orders.
  • Tenants may give a termination notice if they enter into an agreement by misleading statements that are proven to be concealing certain facts.
  • Tenants have the right to break their lease. Tenants will pay a break fee with the following formula:
    – Four weeks’ rent if less than 25 per cent of the fixed term has expired
    – Three weeks’ rent if 25 per cent or more but less than 50 per cent of the fixed term has expired
    – Two weeks’ rent if 50 per cent or more but less than 75 per cent of the fixed term has expired
    – One week’s rent if 75 per cent or more of the fixed term has expired
  • Seven minimum standard requirements for health and safety compliance of rental property that are not limited to what extent they may be applied.
  • Victims of domestic violence will be able to terminate their tenancy and leave the landlord to deal with the perpetrator and any damages.
  • New tenancy agreements and pre-tenancy checklists that are longer than ever before.

Do the laws apply to existing residential tenancies?

Some of the new laws will not apply to existing agreements entered before 23 March 2020.  For example:

  • New mandatory break lease fees only apply to new fixed-term agreements that are three years or less.
  • New landlord information statement requirements only apply when entering into a new residential tenancy agreement.
  • New requirements around condition reports apply when the tenancy agreement is given to the tenant for signing.
  • New information disclosure obligations apply before entering into a new residential tenancy agreement.

Why these rental reforms will add more pressure on housing and rents

Timing is everything and four years ago when these reforms began, the rental and property market was in a different state of play.

Possibly some of the reforms made sense to the legislators at the time when NSW was in a building boom, there was no Royal Commission into banking and finance, and developers’ cranes were in every skyline in the droves.

Fast forward to 2020 and we have completely different property investing market, home purchasing affordability continuing to deteriorate, and a regulatory landscape overlaid with one of the worst droughts and bushfire + flood disasters our nation has faced.

What does this have to do with rental reforms?

Well, in NSW many households are exiting this State with estimations of about 20,000 people per year net loss to other States.  Some other factors include:

  • Developers are not building as much, with building starts in a sharp decline, in some areas a decline of almost 30 per cent.
  • Building and construction reform to weed out poor quality developers and property practitioners.
  • Rental vacancies have increased by more than 210 per cent and rental yields are now at their lowest in over a decade.
  • The ability to obtain investment property loans is much harder post-APRA intervention.
  • Housing debt and mortgage serviceability rates are at an all-time high.
  • Wages are still stagnant and will continue to be that way for many years to come.
  • The cost of recovering from bushfires and drought will run into billions of dollars.
  • Groceries, insurance, health and emergency services costs are set to increase.
  • Retail spending is down and retail chains are closing by the day, going into administration.
  • Property taxes are increasing and incentives are decreasing or under threat of removal e.g. negative gearing, depreciation and expats PPR exemptions.

On top of the pressures listed above, we know the majority of property investors (approximately 74 per cent) are ordinary mum and dad investors who own one, or no more than two, rental properties and likely live in their own home with a mortgage across all their property holdings.

They have bought rental property as a long-term wealth-building strategy and run their properties like any known business with either a profit, loss or neutral gearing scenarios.

History tells us that by adding increased regulation and additional costs in running an investment like a property portfolio with less control and less profit will lead to a situation where costs will have to be recouped some way.

In simple terms, the main way landlords make better margins is either by reducing costs or increasing revenue.  With property-related costs unlikely to go down anytime soon, guess which way landlords are going to recover expenses?

It’s a no-brainer and we’re already seeing some early signs in 2020 of rents starting to move in an upward direction.  It’s likely to continue to trend that way when the reality of such rental reform hits the hip pocket of both landlords and tenants who will feel the heat.

In summary :

  • Reforms are counter-intuitive to the government’s stated goals of providing more freedom – reforms add complexity not clarity.
  • Increased costs for landlords will mean upward pressure on rents.
  • This pressure will add fuel to the simmering fire of lowered supply caused by slowing construction at a time when population increases are at a greater rate.

These rental reforms are a one step forward, two steps back approach to the future of owning a rental property and renting one.

You can read more about the residential tenancy changes that are occurring here

The Property Owners Association of NSW will held the 2020 Property Investors Update covering reviews of three major pieces of legislation on Wednesday 4 March 2020.  The POA NSW holds events on a regular basis.  Click here for more information.

 

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