Consumer Policy Research Centre: A Renters Journey

Talk presented by Justin Butterworth, Founder & CEO of Snug.com on 25 Feb 2019 in Melbourne at the CPRC Conference: A Renters Journey

In Australia, housing is central to our economy and society. As a result, our future well-being as individuals and as a community, depends on good housing outcomes. However, home ownership has been elevated as the Great Australian Dream into our psyche, and many picture this dream of a brick home with a picket fence, a hills hoist and a barbecue. The realisation of this Great Australian Dream has consumed the nation. Yet here we are in 2019, a wealthy nation with massive housing stress coursing through our society - housing indebtedness, negative equity, homelessness, rental stress and housing instability and insecurity are prevalent throughout the market.

Perhaps most disappointing of all, we have allowed a universal human right of shelter to become primarily a speculative asset class.

At Snug, we see the housing market as inefficient because it’s failing to deliver a holistic housing solution accessible by all. We formed our organisation two years ago with the vision to create ‘a place everyone calls home’, and with a mission to create the future of housing.

And we haven’t done this alone. We’ve interviewed hundreds of renters, owners and agents. We’ve gathered feedback from thousands of users online about the current system. We’ve tested our hypothesis and ideas of an accessible and sustainable future housing system.

Renting is the future of housing

The Great Australian Dream is a complex coleslaw of emotional and financial benefits; a bundled good where home provides security of tenure, personalisation and credibility in the community. Ownership facilitates the compound magic of regular savings, leverage and extraordinary tax advantage.

Home ownership is promoted as the path to stable housing and access to Australia’s asset based retirement system (a way to avoid the hassles of renting).

The grim reality is that, for many, home ownership is unaffordable and unattainable.

When Snug looks forward 5-10 years, we see a very different world in terms of employment, mobility, composition of households, consumer preferences, information portability and digital exchange. The expectations of Generation Y and Millennials are very different to those of their parents and continue to evolve quickly. Many don’t own music records or CDs, nor own a car (nor have a driving licence). Instead they subscribe, swap and share through the economy.

We believe the future generation will value access over ownership, they’ll pursue experiences, value flexibility, convenience and personalisation. The next generation will need a home wherever life takes them: perhaps from Bondi, to Berlin and back to Bankstown, Broome then Balwyn.

For these reasons, among others, renting is the future of housing. We believe the Great Australian Dream will be a great rental system, that efficiently delivers access, choice, affordability, stability and security.

Snug is reimagining the Great Australian Dream by unbundling home and ownership. We’re creating a new model of housing we call HomeVesting. Snug’s proposition is ‘Live where you love and invest where it matters’.

HomeVesting will comprise of longer home leases - from 1 to 24 year contracts, with increasing homeowner-like benefits for those that make the commitment to longer-term leases; and collective investment which provides diversified strategic ownership of property.

A Snug user will enjoy lifetime housing and build their retirement savings.

However, to enable HomeVesting, we must resolve the rental market inefficiencies to deliver consumer centric experiences for Renters and Owners.

We believe both Renters and Owners value stability and security

We believe that mid to long term leases encourage stability and security for both owners and renters. Longer leases should provide certainty around future rental prices through locked-in rent or limited ability for price increases, encourage better service standards and responsiveness, allow for the ability for renters to reasonably personalise their home and allow for fair exit processes for when life throws curveballs at you.

We see market inefficiencies in the rental industry:

Market inefficiencies in the rental industry are everywhere; the rental bond system is riddled with inequities and barriers to entry, incomplete price signals fail to account for true costs and mislead renters, and a failure to automate and systemise in a market where powerful incumbents and regulators limit the ability for success for small businesses.

In addition to market inefficiencies, there are business models that operate to the detriment of owners and renters, the end users.

Churn, encouraged by listing fees, is to the detriment of owners, who prefer long-term, stable tenancies, by selection of the right tenants on the first time around.

Furthermore, there are incentives to lower costs by reducing service levels to the minimum standards required by law, impacting the party least empowered; which are renters.

At this stage of our mission, Snug is focused on helping renters and owners enter in to better rental relationships in two ways with Snug Match.

First, Snug is making applying for properties easier

The rental market is not exchanging efficiently. It takes too long to lease a property. There are at least 10 different steps in the lease process, offline and online. As such, we’re building a single rental platform to make this journey more efficient.

Aside from streamlining the leasing workflow, we’re working to ensure the inclusion of new renters, migrants and vulnerable renters such so they are able to put their best foot forward without selection bias or discrimination.

We’re also providing over $1 million worth of free resources each year including: free background checks and supporting a Facebook group with 190,000 renters that post over 75,000 adverts each year, free of charge. We also provide resources on Discrimination, NRAS, Tenancy Databases and Government Bond Loan Schemes.

Snug Match rental applications lift and shift from the status quo, moving us towards a new way of applying for properties, that helps match the parties and removes the need to directly expose private information, allowing for a fairer application process.

Second, we’re attacking the problem of Rental Churn

Around 90% of leases are either 12 months or periodic and 40% of leases churn within the first 2 years, increasing costs for both renters and owners. Moving is costly for renters and owners, and aside from life events, is caused by three factors:

  • Mismatched expectations around tenure and rent increases

  • Low performance of the provider

  • Effective cost is higher than expected due to eg. travel time, energy costs and unknowns

Enabling both parties to share relevant information that resolves the trust and risk issue will facilitate long term leases. Snug Match is our response to this. It’s a patent-pending matching algorithm that creates a compatibility score for renters. The renter can input their profile data and interactively adjust their application to improve their Match score, relative to the owner’s persona and property attributes.

Owners can choose to have renters’ Match scores optimised for either rent, occupancy or property condition. For example, an older woman entering the rental market may be best matched to a self-managed super investor that prefers ‘set and forget’ occupancy rather than a speculative investor.

Further to Matching, we believe the market will significantly benefit from standardisation of 17 terms in a residential lease outlined in our blog.

We call on State Governments to deliver a national lease to enable innovation at scale and help us address outcomes of stability and security.

Third, we’re working to improve the renter experience with products such as BondCover.

BondCover aims to replace $4b in cash rental bonds with a digital guarantee with the same rights and obligations, thus creating an instant cashless security. Cash bonds assume that renters will do the wrong thing. Snug works from the assumption that renters will do the right thing.

Our analysis of around 2 million bond records showed, default risks are very low and holding cash has huge liquidity and opportunity costs for renters particularly over the long term. Renters could subscribe to a bond guarantee for around 3.3% of the face value of the bond (reduced by 80% over 4 years) plus a small admin fee. A cash bond would convert to around 30 years of BondCover.

Consumers should be protected when using Snug’s BondCover by a strong regulatory framework including:

  • Requiring an APRA regulated underwriter, in our case: IAG

  • Licensed product terms

  • Structured claims process with right of reply, for fast and fair outcomes

  • Claims payment on consent or tribunal order

Snug’s consumer policies further protect vulnerable members of the community and assisting victims of domestic violence & hardship by waiving claims and offering interest free payment plans.

The consumer and public benefits are clear: improved affordability, access and choice, improved long term housing security, redeployment of capital more productively, reduced red tape and friction, and more broadly it support for the innovation economy and lower cost of government.

Based on Commonwealth Treasury modelling assumptions of 70% of transfers being spent and 30% saved. In Victoria for example, cash bonds, returned to renters a $300m per annum for 3 years, could increase Victoria’s GSP by $600M and create over 4000 jobs.

Bonds are arguably the greatest barrier to entering the rental market and a trap for moving. Over 3500 renters have pre-registered interest for around $5m worth of BondCover.

We’ve had over 140 meetings with stakeholders from Ministers, Departments, and across the real estate industry, as well as tenancy, consumer and housing groups. We believe with stakeholder engagement, and various legal and social options, digital bond guarantees will succeed because they trust renters and return their capital.

Best of all, very minor regulatory changes are required to maintain the integrity of the rental system, while providing greater rental market access and choice. Snug seeks the support of State governments to enable market formation of bond guarantees, allowing for easier access to the rental market.

Just two years into our journey, Snug’s innovations and future vision of housing has more than started conversations, we’ve in fact been a catalyst for major players to now invest significantly in customer centric products in the rental market.

Digital innovation represents an opportunity to both resolve market failures for consumers today and importantly lay the foundations for future consumers. At Snug, we are focused on market transformation, not disruption. This requires ongoing active dialogue between innovators, stakeholders and regulators, which we warmly welcome and encourage.