The impacts of rising construction costs and inflation on the property market have direct implications for landlords, as we explored in part one of this series here. Tenants aren’t immune either, and their ‘rental stress’ is shared with landlords. Read on to find out why.
Rental stress means exactly what it implies. It’s the pressure, or stress, a tenant is under because of the rent they are paying.
As the rental crisis in Australia has deepened in current market conditions, tenants and their advocates have been asking for the pressure to be lessened.
The dilemma for landlords is that they are sharing the pressure of their own increased costs. But rental stress is another risk they need to consider and manage.
So – how do you know if your tenant is suffering rental stress? A household is in rental stress (as defined by the ABS) if they are spending more than 30 per cent of their gross household income on rent. Severe rental stress is defined as spending 38 to 60 per cent of income on rent.
Let’s explore the potential impact of rental stress on investment properties and insurance.
Figures from Digital Finance Analytics revealed 61.79 per cent (or 1.91 million) households were experiencing rental stress in January 2023.
Data in SGS Economics and Planning’s Rental Affordability Report, showed single pensioners need to spend up to 70 per cent of their income on rent, while it’s up to 53 per cent for pensioner couples. Up to 69 per cent of a single part-time worker parent on benefits income can be directed towards rent, while a single person on JobSeeker requires 59-117 per cent of their income to pay their rent.
According to the RBA’s Renters, Rent Inflation and Rent Stress bulletin, renters are more likely to experience financial stress than mortgagors, with current information suggesting that financial stress for some renters has picked up over the past year. National Debt Helpline website traffic, where rent is cited as a concern, has increased since mid-2021, with rent consistently being one of the two most reported concerns. Also, community service providers participating in the RBA’s liaison program, report that demand for financial assistance and counselling has also increased, primarily from renters.
The bottom line
With the increase in rental stress, there is also a risk of more tenants defaulting on their rent. Rent arrears is one of the main reasons landlords claim on their insurance. And rent default, which is where a tenant fails to pay the agreed rent and is in breach of a written tenancy agreement, is a key claims area. While there are several reasons why a tenant may default on their rent, it is often due to financial hardship.
The impact on insurance
Missed and late rent payments can quickly spiral out of control and landlords and agents need to keep on top of arrears.
An insurance policy will limit the number of weeks that can be claimed for loss of rent due to rent arrears and delays in resolving the matter can lead to the landlord being out of pocket for an extended period.
It’s also important to note that there is a condition in insurance policies relating to acting to prevent further losses, which means that addressing arrears is a requirement.
And remember that you need to have followed the procedure for legal eviction before you can make a claim for rent default on your landlord insurance. As the eviction process can take weeks, it’s important to act quickly in rent default cases to limit the financial impost the landlord may face before claiming.
Another matter to consider is that of leniency. Landlords may decide to help struggling tenants by waiving rent or agreeing to a reduced rent. As far as insurance is concerned, the gap arising in these situations is generally not considered a ‘rental loss’ and cannot be claimed.
Rent default is a leading cause of landlord insurance claims. You and/or your agent need clear processes for addressing rent arrears. Insurance will provide cover for a maximum number of weeks, making it important to get on top of missing or late payments quickly.
It pays to be vigilant, especially considering the current issues with rental affordability and rental stress as these increase the risk of your tenants defaulting and you being left out-of-pocket.
Have a question about cover? Contact EBM RentCover’s friendly team on 1800 661 662.
*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are here, contact 1800 661 662 if you have any questions.
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