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The Rental Debate Has Been Derailed

By Ray White Whitsunday
Nerida Conisbee,
Ray White Chief Economist

Like most people in the property industry, I was dismayed that a key revenue item in the recent Victorian budget was to increase land tax payments for investment properties. In the middle of a rental home shortage, now is not the time to ensure even fewer rental properties. 

Unfortunately, the Victorian government is no exception to a lack of policy aimed at trying to fix housing shortages and rapid rental increases. On one hand, there is a recognition that we need more rental properties and more houses, but on the other, governments are hooked on the revenue that rental properties and development provide. The desire for revenue is now completely overwhelming the desire to ensure that people are adequately housed. 

The rental debate has been completely derailed so that the dominant messaging right now is that owners of rental properties and companies providing new housing need to be punished – whether that is through higher taxes, calls to cap rental levels, restrictions on finance and disjointed planning systems. It is no wonder that there is growing weariness amongst property investors and developers – loans to investors are dropping rapidly as fewer enter the market while the number of housing approvals continues to fall. This rental crisis will continue to be a problem for many years but could be short circuited if action is taken now. 

State and federal governments have rightly turned their attention to build-to-rent to help with rental property supply. The most recent federal budget pulled taxation in line with other forms of commercial property investment which will help more projects get off the ground. The problem however is that this form of rental housing is still a tiny proportion of total rental stock. Even with the tax changes, it is unlikely to lift the total proportion of rental homes that are supplied by build-to-rent to much above two per cent. The other problem is that almost all build-to-rent properties around the world are apartments. While this suits a lot of people, it is not for everyone and families, particularly with small children still prefer a house. 

A more rapid way to increase rental supply would be to incentivise the two groups that already provide most of it. The first are mum and dad investors. An incentive similar to Home Builder but restricted only to investors would quickly get more rental properties out of the ground, as well as provide a mix of both houses and apartments. Mum and dad investors provide almost 90 per cent of rental housing currently and have been a ready source of capital for a long time. 

A second group to try to get back investing are foreign buyers. Foreign investors are restricted to only buying new properties in Australia and last decade, their buying activity kickstarted most large scale apartment projects around the country. Apartment projects require a certain amount of pre-sales before starting and many of these pre-sales were made to buyers from overseas. While the anaemic activity of foreign investors has in part been due to issues out of our control, a reduction in additional taxes that were introduced at the end of last decade would be a good first step. 

Another main challenge is town planning which is stuck in a difficult position between many residents not wanting new homes in their local areas and an overarching goal in most states to increase housing density. Obviously rampant development without checks is not desirable but changes to how approvals for new projects are provided should be investigated urgently. 

Unfortunately there are some things that are problematic but can’t be fixed easily. Rapid interest rate rises are strangling the pipeline of housing supply and leading to fewer rental properties. Perversely, high rental growth is driven in part by higher rates and also feeds into higher inflation. This doom loop is problematic but high inflation is also damaging and fundamentally controlling this is the role of the RBA. Construction costs are coming down, driven by cheaper materials but labour costs remain high. Higher migration will assist with this but will take some time to resolve. 

Finally, there are some glimmers of hope. In the most recent Western Australian budget, the stamp duty rebate for off-the-plan developments was extended to both investors and foreign buyers. On the Gold Coast, where rental shortages are particularly acute, there have been calls by the mayor for households to rent out spare bedrooms. And in a recent RBA analysis, it was found that people are moving in together to save on rent – average household size is starting to increase. 

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