Banks may soon be required to ensure prospective landlords can afford not only the purchase of investment properties but also the ongoing costs of maintaining them under a new proposal aimed at improving housing affordability and rental living conditions.
The recommendation, made by the Consumer Policy Research Centre (CPRC) during a Senate inquiry into the financial regulatory framework and home ownership, calls for banks to consider whether investors can meet minimum property standards over the lifetime of their loan. This inquiry is examining the impact of current lending regulations on homeownership in Australia.
A Broader View of Borrowing
Erin Turner, the CPRC’s chief executive, explained that while banks currently assess various expenses, such as general living costs when evaluating a loan application, they often overlook the financial burden of maintaining rental properties to a livable standard. “What we’re asking for is simple: if someone is borrowing to buy an investment property, make sure they can afford the property as a whole, and that includes maintenance and repairs that come with owning that investment asset,” Turner said. She stressed that maintaining rental properties is essential to ensuring renters live in acceptable conditions, making this a responsibility that extends beyond just financial institutions to federal regulators.
Turner further highlighted the intertwined nature of Australia’s financial and housing systems, emphasizing that when people borrow to invest, there must also be consideration for the experience of tenants living in those properties.
Investment Loans as Business Loans
NSW Tenants’ Union chief executive, Leo Patterson Ross, added that investment loans should be treated more like business loans, requiring more detailed scrutiny. “Banks have been lending money to people for investment purposes without ensuring that they can actually deliver the service expected with the funds provided,” he said. “Lenders should ask, ‘Do you have a business plan? What’s your risk profile?'” This perspective frames property investment as a business, requiring a clear ability to manage both the asset and associated responsibilities, such as repairs and maintenance.
Patterson Ross also suggested that limiting credit could help address high property prices. “We’d see a drop in property prices,” he noted. “Our problems at the moment largely come back to it being exceptionally easy to get a lot of money and bid prices up. If we had less credit available, prices would be lower.”
Varied Rental Standards Across Australia
While minimum rental standards vary across Australian states and territories, landlords are generally required by law to keep their properties in good repair and address maintenance issues promptly. The CPRC cited 2020 research showing that about 25% of rental properties in Australia required repairs, underscoring the need for stronger regulation.
Responsible Landlords and Market Impact
Turner believes that these proposed changes could reduce the number of underprepared investors entering the market, resulting in a higher quality rental market. “What we want in the private rental market is great landlords who can afford to fix the oven when it breaks,” she said. She added that while tighter regulations may deter some prospective investors, the result would be a higher standard of rental properties, benefitting both tenants and responsible landlords.
Housing investors have recently begun to exit the Victorian market following changes to land taxes, increasing supply and putting downward pressure on house prices, particularly in Melbourne.
However, some experts warn of potential downsides. Jarrod McCabe, director of Wakelin Property Advisory, expressed concerns that such changes could reduce the supply of rental properties. “I think the intention is good, but the issue is they’re never on their own,” McCabe said. “One of the biggest issues we’ve got at the moment is, yes, we need to have high-quality homes, but we also need to have homes.”
He suggested that landlords exiting the market could lead to sales to owner-occupiers or better-prepared investors, potentially resulting in a neutral impact on the rental market. McCabe also argued that if the government becomes concerned about landlords selling, it could step in and purchase properties to maintain supply.
Turner agreed with this sentiment. “If an investor doesn’t buy a property, it doesn’t just disappear,” she said, emphasizing that properties will remain in the housing stock regardless of who owns them.
McCabe also noted that his property advisory company already recommends investors set aside funds annually for repairs, even if they are not urgently required. However, he acknowledged the challenge in determining whether landlords are unable or simply unwilling to carry out necessary maintenance. “That’s an unfortunate circumstance with some rental providers. They don’t have the right mindset, which is not ideal. In fact, it’s worse.”
Both Turner and Patterson Ross concluded that these changes could also temper investor demand and borrowing power, which would make the housing market easier to navigate for first-time buyers.
