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With first home buyers under such pressure, should 5 year leases now become an option nationally?

With first home buyers under such pressure, should 5 year leases now become an option nationally?

It’s been a year now since the Andrews Government in Victoria announced its intention to introduce longer-term leases as an option for Victorian tenants. With the changes intended to be rolled out sometime this year, tenants and landlords need to understand the impact 5 to 10 year leases may have on their financial future.  

The move is part of a plan to make housing more affordable for average Victorians and is accompanied by other incentives such as the abolition of stamp duty for first home buyers (on select purchases) and an increase of the FHOG to regional Victorian buyers, amongst others. Until these changes were outlined, most residential leases in Victoria were set to a 12 month period, with the Residential Tenancies Act only covering leases of a maximum of 5 years. The current Act is also more than 20 years old and the rental market has changed considerably in that time, so a review was considered overdue. According to the Victorian State Government’s research, in the 15 or so years leading up to 2011, private rentals increased by 50% and rental prices have increased considerably as a result. Less than 8% of properties new to the rental market were considered affordable (meaning rent is not more than 30% of household income), when a decade ago that figure was closer to 30%.  

On the one hand, these changes address the fact that many Victorians just may not be able to buy a house in their near future, thereby establishing a new perspective on renting as a viable long-term housing option – especially for single income earners and families who may struggle to cover mortgage and interest repayments. On the other hand, it could encourage those same Victorians to buy an investment property, knowing they could have a stable rental income for the first decade for example, of their mortgage. However, the incentives for buyers that are also being introduced, are aimed at owner occupiers, therefore the long-term lease option is only of benefit to renters or landlords.

The Australian dream of buying and owning our own homes has meant that, to some extent, Australian renters have always been considered second class citizens. It’s rare that renting is considered a preferred choice, because home buying has such a cultural expectation attached to it. We could learn a lot from European cities in this respect with long term renters the norm in many cases. Germany for example has had a relatively stable housing market for many years and in many cities, renters make up the majority. This is partly cultural, but also because the market takes a much more creative approach to its tenancy agreements. Long term renters in many cases are given freedom to improve the property as they choose, including renovating and upgrading it (at their expense in many cases); as long as the property is returned to its original (or an agreed) condition when the tenants vacate. Seasonal options also apply such as renters being able to offer short subleases through the winter or summer while they relocate to a family owned small summer garden house, or to a warmer climate for the winter months. This kind of flexibility gives renters much more of a sense of ownership of the property and increases the likelihood they will renew their lease 2 or 3 times – giving the landlord secure rental income for decades, whilst having a stabilising effect on the property market overall. This has been the case for a long time, however the sharing economy has had a dramatic impact on these seemingly idyllic structures and governments have had to step in to adjust legislation accordingly.   

Back on home soil though and there are certainly pros and cons to signing on for 5 year leases (or longer). Of course, modern life can be unpredictable and 5 or more years can be a long time to lock in for certain kinds of tenants. A share house of university students for example are less likely to want to stay on after graduating and young professional couples are in the prime life stage for changes in circumstances – promotions that require a move interstate, decisions to get married, or starting a family, can all happen quickly. If any of these options are in their 5-year plan, they are hardly likely to want to lock in a 5-year or more lease.  

On the flip side, some tenants - particularly families - will embrace the security of knowing they can set up a life in a community with schools, sporting clubs and health care support; without the fear that it will all change in 5 years when their lease ends. Landlords can also have the peace of mind that they have income security for a longer period of time, with the potential of a decade’s worth of rental income locked in.

So, Victoria’s new approach brings with it perceived security and stability and responds to the increasing number of people renting over buying, but does it offer the flexibility a tenant needs and will there be an easy-out clause if they want or need to break a 10-year lease (which was relatively simple when 12 months was the time frame). Additionally, will landlords get the same return on their investment with longer term tenants and how do they terminate the lease of bad renters who might still have 8 years or more left on their agreed 10 year lease? The changes are to be tabled in Victorian Parliament early this year and rolled out shortly after, so for now we must wait and see what the real impact will be.

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DISCLAIMER

The following advice is of a general nature only and intended as a broad guide. The advice should not be regarded as legal, financial or real estate advice. You should make your own inquiries and obtain independent professional advice tailored to your specific circumstances before making any legal, financial or real estate decisions. Click here for full Terms of Use.

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