Why did we make it harder for younger Australians and low-income workers to own homes? Did we forget some wisdom from the past?<\/p>\n
Or are their investments “boosting the supply of rental housing” because they’re purchasing pre-existing owner-occupied properties and converting them into rentals, which reduces the supply of owner-occupied dwellings and does nothing to increase the overall supply of housing?<\/p>\n
It’s a serious issue that is obscured by a rhetorical trick.<\/p>\n
How do we visualise it?<\/p>\n
Let’s say there are 16 properties.\u00a0<\/p>\n
They’re all pre-existing owner-occupied dwellings, as represented by these 16 rectangles:<\/p>\n
<\/p>\n
You could purchase four of those existing owner-occupied dwellings and convert them into rentals.<\/p>\n
That would allow you to say, technically, that you’ve just “increased the supply of rental housing” by four properties.<\/p>\n
But you would have done nothing to increase the overall supply of housing. There would still be 16 properties.<\/p>\n
And you would have just decreased the number of owner-occupied dwellings from 16 to 12:<\/p>\n
<\/p>\n
Or you could build four new properties specifically to rent out.\u00a0<\/p>\n
That would leave the 16 owner-occupied dwellings untouched, but there would be four new rentals.\u00a0<\/p>\n
Therefore, you would have “boosted the supply of rentals” by four, and you would have boosted the overall supply of properties by four, so you’d now have 20 properties, up from 16.<\/p>\n
<\/p>\n
Which scenario was more honest?<\/p>\n
Turning established dwellings into rentals<\/p>\n
Last week, the Australian Bureau of Statistics released housing finance data<\/a> for the September quarter.<\/p>\n Independent economist Saul Eslake said the data highlighted one aspect of what’s wrong with Australia’s housing system, and the housing policies of successive Australian governments.<\/p>\n Queensland rental vacancy rate holds at 1 per cent<\/a><\/p>\n New data shows the rental vacancy rate across Queensland remains stuck at 1 per cent, with real estate agents saying demand is “unprecedented”.<\/p>\n And it had to do with the concept we discussed above.<\/p>\n Mr Eslake said in the September quarter, finance commitments to residential property investors accounted for 40.6 per cent of all housing finance commitments.<\/p>\n That was the highest proportion since the June quarter of 2017, and it wasn’t far below the all-time high of 48.7 per cent in the June quarter of 2015.<\/p>\n In the September quarter, finance commitments to residential property investors accounted for 40.6 per cent of all housing finance commitments, the highest proportion since the June quarter of 2017. (Source: Saul Eslake)<\/p>\n Then, digging into the data, Mr Eslake said 83 per cent of the finance commitments made to property investors during the September quarter were for the purchase of established housing.<\/p>\n And he had an issue with that.\u00a0<\/p>\n “No doubt these investors will be congratulating themselves for adding to the supply of rental housing,” he wrote on LinkedIn.<\/p>\n “[But] these purchases do absolutely nothing to increase the overall supply of housing: and while they do increase the supply of rental housing, they increase the demand for rental housing by an exactly equal amount \u2014 by outbidding would-be owner-occupiers.<\/p>\n “So, contrary to what they consistently argue, if they weren’t buying these established properties to rent out (and ultimately reap capital gains on which they pay tax at half the rate they’d pay on other income, and in the meantime offset their interest expense against their other income to reduce the amount of tax they pay on that), the supply of and demand for rental housing would fall by equal amounts, and there would be no impact on rents at all.”<\/p>\n Mr Eslake said action from governments was overdue.<\/p>\n “It really is time for governments to be winding back the generous concessions which the tax system provides for speculative investors in established property, and restricting those concessions to investors who build or purchase new properties, and who are thus contributing to increasing the supply of housing (and in particular of rental housing),” he said.<\/p>\n “Doing so would probably encourage more investment into increasing the supply of rental housing, as opposed to pushing up the price of the housing we’ve already got, which is what our current tax system encourages \u2014 in spades.<\/p>\n “And perhaps the Australian Prudential Regulation Authority should be seriously considering re-introducing some of the constraints on lending to investors that it implemented in the mid-2010s when a similarly high proportion of housing finance was going to speculators rather than home-buyers.”<\/p>\n A question of quality<\/p>\n It sparked a lively discussion on Mr Eslake’s LinkedIn page.<\/p>\n He said winding back tax concessions for investors who purchased established dwellings (to turn them into rentals) would not be a silver bullet, but it would surely be part of the solution to the “perverse incentives and inequities built into our taxation system”.<\/p>\n Macquarie Law School professor Cathy Sherry, author of Strata Title Property Rights: Private Governance of Multi-owned Properties,<\/a> then contributed to the discussion, saying she had “serious doubts” about keeping tax concessions for new builds too.<\/p>\n<\/p>\n