What would a hibernation mode of rental costs look like?
Shelter WA would like to acknowledge the modelling developed by Leo Patterson Ross, Chief Executive Officer at Tenants’ Union of New South Wales. Shelter WA has used the same methodology, but using Western Australian based data as Leo showed in his article which can be found here.
The COVID-19 crisis has brought to light the importance of having a home whilst also highlighting the financial stress felt by both indebted landlords and low to moderate-income renters.
Median rental payments
Throughout these unprecedented times, questions surrounding what median rental payments would be, and what would a hibernation mode of rental costs would look like, have led many organisations to create some interesting models.
‘Hibernation mode’ refers to the minimum amount of rent needed during a state of emergency to cover the most critical costs landlords face in holding investment properties, after government and financial institutions have reduced cost barriers.
‘Hibernation Mode’ Cost per week
Under this modelling we would expect that the hibernation rent of WA would be $226 per week.
This is just 65 per cent of the median weekly rent repayment for Western Australia ($350). However, this must be the average cost to landlords once all barriers have been removed, including the waiving of land tax, which has not yet been seen in Western Australia, as highlighted by AHURI. This model demonstrates how governments can rethink rental charges on landlords during times of crisis. It presents an opportunity for all levels of government to come to the table and assist both landlords and tenants, so neither is placed under increased financial pressure at this time.
Image source: AHURI, found here.
What does this Hibernation Mode of Costs of rent tell us?
• When the big four costs for holding an investment property are removed or minimised, the actual cost of rent needed for a landlord to maintain a rental property in Western Australia becomes affordable both to the landlord and the tenant.
• The largest proportion of rental costs to landlords is mortgage interest repayments. This highlights that in times of crisis, it is not just governments that need to provide rental relief but also major financial institutions. Simply deferring loan repayments is not enough. The biggest assistance to landlords is deferring interest accruals over an emergency period.
• Western Australia must introduce land tax relief to residential property investors or at best, remain in line with the eastern states, as shown in the AHURI diagram.
• Relief to landlords during this crisis and also during the recovery phrase post-COVID-19, means they are able to provide rental relief to tenants. The Residential Tenancies COVID Response Act 2020 creates the legislative framework to enable tenants to negotiate with their landlord a rent repayment agreement. It is more likely these agreements can be entered if other costs to landlords are addressed.
• Federal, state and local governments, and financial institutions need to take actions to prevent the accrual of payments and deferrals that will result in more financial stress post-COVID-19 to both tenants and landlords.
For the reasons outlined above, Shelter WA recommends that rather than payments simply being deferred, a model of hibernation, like this one is adopted to reduce the costs to both landlords and tenants during states of emergency.
How were the figures calculated?
Firstly, we had to determine what the average cost of holding a property was for landlords in WA. To do this we took the weighted average of the most recent four years of claims for tax relief made by landlords for Western Australian properties directly from the ATO taxation statistics, found here. Then raising those figures to today’s dollar using the CPI index for the cost of living by state, found here. This gave the below chart which, with reasonable accuracy, estimates the average costs’ landlords would face this financial year.
The tax claims used to calculate the average costs to landlords in WA included:
- Mortgage (not principal) – interest on loans (79 per cent) and borrowing expenses (19 per cent).
- Costs of access – council rates (93 per cent), water (91 per cent), and land tax (35 per cent).
- Depreciation – plants and equipment (70 per cent) and capital works (46 per cent).
- Property maintenance – repairs and maintenance (77 per cent), cleaning (15 per cent), gardening (23 per cent), and pest control (13 per cent).
- Body corporate fees (23 per cent).
- Sundry expenses – sundry rental expenses (53 per cent), advertising for tenants (17 per cent), stationery and communication (32 per cent), travel expenses (28 per cent), and legal fees (3 per cent).
- Property management (60 per cent).
- Insurance (79 per cent).
The average costs were then combined under each of the above categories to give the below-average cost diagram.
Costs can be reduced or suspended
Given the current circumstances of our economy, it is evident that during the COVID-19 crisis some of these costs could be reduced or suspended to create a hibernation mode of rental costs.
With banks currently allowing the freezing of mortgage repayments, we can take these costs out of the hibernation model. We can also remove the cost of access as council rate payments and water chargers have been suspended for the crisis period. We have also assumed land tax has been suspended however, this is not yet the case for Western Australia. We can also remove any capital works costs as we would assume that new constructions and installations continue during this time.
Maintenance is a necessary expenditure, as we cannot have people living in poor conditions and unmaintained homes. Whilst non-urgent maintenance has been allowed to be suspended, we still want maintenance on homes to be occurring, as it maintains living standards and provides the economic stimulus and work for tradesmen. Furthermore, as some maintenance costs and insurance costs are included in the body corporate fees, we have increased both by 10 per cent and removed body corporate fees from the hibernation model.
This leaves us with the below chart, whereby the hibernation model would consist of property maintenance, management, commissions, insurance and sundry expenses.
Finally, by simply dividing the total above hibernation mode costs by the number of weeks in the year (52.14 weeks) we can calculate the hibernation rent per week to be $226 as shown in the first diagram.