Imagine the following scenario. You loan a car from a mate for a fixed period of 12 months.
It is agreed that you will provide a mutual mate a $2000 security deposit as insurance against any damage. This will be returned in twelve months providing you have not damaged the vehicle in the interim.
But when you return the undamaged car you discover your ‘mate’ has invested the money in an interest-bearing account and pocketed the interest. Doesn’t sound fair does it?
This is precisely what happens with rental bonds in Australia.
As it stands, prior to signing a private rental lease agreement, renters are required to pay a bond, equivalent to a minimum of four and up to six weeks’ rent.
Bonds are held in trust by government authorities, which pocket millions of dollars in interest. (In New South Wales, the authority is the Rental Bond Board; in Victoria, the Residential Tenancies Bond Authority).
Bonds are meant to give landlords protection if the tenant fails to comply with their lease obligations. All too often, the return of bonds can be stymied or held up by landlords or judged at the discretion of real estate agents.
Even then, so-called ‘end of lease cleaning’ eats away at monies returned to renters. Tenants feel compelled to pay end of lease cleaning out of fear their bonds will not be returned.
Over 30 per cent of renters do not get bonds back, totalling $2 billion in lost money. More than four in ten (43 per cent) Generation Z renters lose their bonds, compared to 38 per cent of Gen Y renters and 31 per cent of Gen X renters.
The bigger scandal involves bonds not earning interest for renters – after all, it is their money.
Whether a lease is terminated at six or twelve months, two years or even longer periods, the bond paid at the time of signing a lease is the same returned to the renter at expiration (presuming no subtractions are made for damage).
This is a literal case of ‘rent money is dead money’ and illogical economically, reducing our national savings.
By contrast, a larger pool of income or interest-generating savings would help renters and have economy-wide implications, particularly during COVID-19 recession, when so many young Australians have drained their superannuation accounts to virtually zero.
As the Australian Prudential Regulation Authority revealed, last quarter’s net contribution flows to the superannuation industry were negative for the first time since the inception of mandatory super in 1992.
Why do bonds matter? Australia is becoming a nation of renters.
As of August, there are 2.6 million households and eight million people renting, or 31 per cent of the population.
Australians are renting for longer and often permanently as home ownership grows out of reach for generations of working and middle-class Australians, and the national supply of affordable housing remains woefully inadequate.
As a nation, we need to move on ‘dead money’ bonds not delivering for renters and not being used to bolster national savings.
Alternatives for this estimated $4.5 billion worth of savings should be considered: Bonds could be placed in an interest-generating, guaranteed account run by state and territory governments or the Commonwealth; or bonds could be placed in the renter’s nominated superannuation account, with appropriate legislative amendments to facilitate.
But the interest earned, or return on investment, would be solely owned by renters.
At the end of lease, the bond, depending on adjustments made for damage, could be held in perpetuity, or released to the renter with interest. Either way the bond monies should be put to work for the benefit of renters and in turn Australia’s economy.
Obviously, a reform of this nature will affect self-funding statutory authorities tasked with overseeing the existing rental bond system – we know that $60 million is raised in interest each year from bonds in New South Wales alone – and the good work of tenants’ advocacy groups, which are often funded from the interest earned from bonds.
It will be necessary to put in place transitional funding arrangements.
Australia would be following the lead of Germany, which generally provides a fairer go for renters. Instead of renters losing money in real terms through inflation attrition or regressively subsiding government agencies, bond deposit accounts (Mietkautionskonto) are held with banks which provide interest to renters.
Our proposal is popular. Most Australians agree that renters should receive the interest earned on their security bonds instead of government, according to polling conducted by Essential Media.
Fifty-five per cent agree that renters should receive the interest earned on their bonds, while 13 per cent disagree and a third (32 per cent) are undecided.
The undecided figure reflects the fact most Australians don’t know their money is being invested to fill government coffers. Very few people oppose this reform.
If we think big, we can make bonds work for the growing number of Australian renters, which is also in the interests of our economy and nation-at-large.
Nick Dyrenfurth is Executive Director of the John Curtin Research Centre and the author of its new report, Rental Nation: A Plan for Secure Housing in Australia.
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