The real reasons for Australia's housing crisis

Australian house prices and rentals are amongst the most expensive in the world.  Sydney was recently ranked the second least affordable city in the world after Hong Kong, with Vancouver in third place.  Other Australian cities were also highly ranked, with Melbourne the ninth least affordable, Adelaide the fourteenth and Brisbane fifteenth.  High construction costs, restrictive planning regulations,and government charges on developers are major contributing factors to high dwelling prices.  In the ACT, the government's land monopoly and restricted land releases are major influences on high land prices in that jurisdiction.

Statistics (and good old supply and demand) tell the recent tale of our housing shortage.

In January 2023 total dwellings approved fell 27.6 per cent (seasonally adjusted), while private sector dwellings approved (excluding houses) fell a whopping 40.8 per cent.  Rental vacancy rates dropped by 36.1 per cent nationally in the year to January, according to Domain.com, while rents continued to soar.  Its data show that the national rental vacancy rate fell to its lowest point on record - 0.8 per cent - in that month.  Other sources show the same trend, though their absolute figures are not quite as low.  According to PropTrack, the rental vacancy rate is now half the level seen before the pandemic.  With reduced building activity and plans for a surge in immigration, housing shortages are only going to get worse.

As far as provision of housing is concerned, private supply dominates.  According to the 2021 Census, our housing stock consists of 6.2 million owner occupied dwellings and 4.7 million rented dwellings, with only about 350,000 of the latter being comprised of state or community housing units.  Overall, Australia is overwhelmingly dependent on privately provided housing.  If the incentive for investing in housing is reduced, the housing shortage worsens, which is what has happened.

A key driver of investment in housing is interest rates.  This reflects that most dwelling purchases are made with borrowed money.

It is obvious that the rapid escalation of interest rates over the past year (to counter rising inflation) has reduced investor activity in housing, and has been the biggest factor in the large decline in housing approvals.  This has all happened because governments (across much of the world, not just in Australia) stimulated their economies by too much and for too long during Covid.  They now stubbornly refuse to tighten fiscal policy by reducing spending and/or raising taxes.  The result is that almost all the burden is being placed on interest rates, with housing being hit disproportionately.

The housing market will come under still greater pressure  for two reasons.  Firstly, some further increases in interest rates are widely expected.  Secondly, a lot of borrowers are still on low fixed rates, and more will be hit with big rises when their fixed terms come to an end over the next year or two.  Renters are at the pointy end of the market because, during a major shortage, they are the ones most likely to end up homeless.

It is not just interest rates that have been slugging (the mostly Mum and Dad) investors in rental housing.  While there are big incentives for owner occupied housing (e.g. grants and stamp duty concessions for first home buyers, exemption from capital gains, tax-free imputed rent), government impositions actively discourage people from becoming landlords and drive up private rents in the process.

Investors are generally slugged an extra 0.5 per cent p.a. interest over and above the rate charged to owner-occupier borrowers.  Such price discrimination is normally illegal under trade practices legislation, but is mandated under financial regulation in this country.  Interest rate differentials arguably should reflect the risk of default, so that in many cases the reverse should apply and investors might merit a discount instead of the current penalty loading.

Council rates are supposed to reflect the cost of providing services to property owners.  Instead of applying this principle, investors in rental housing are, however, systematically overcharged relative to owner occupiers.

In many jurisdictions small flats (mostly owned by investors) are charged almost the same rates as bigger units, despite having lower valuations and fewer occupants.  In turn, two bedroom units commonly pay disproportionate rates relative to larger houses.

It gets worse.  Many councils, especially in Queensland and WA, now apply a "differential rates policy".  In essence, they charge higher rates for a given property, if it is owned by an investor, despite such owner status having no bearing on the level of services provided.  Differential rates are simply a revenue grab, facilitated by the fact that many investors live interstate and thus can't vote in the relevant local elections (breaking the equity rule of no taxation without representation).

Then there is land tax on rental properties, - another money grab.  Suffice it to say that land tax (like most other imposts on landlords) eventually gets passed on to tenants.  It is not a coincidence that the ACT, which has the most savage land tax - up to 1.4 per cent of residential land value and no tax free threshold - also has the country's highest rents.  Queensland recently(unsuccessfully) sought to tax landlords based on their total Australian land holdings, not just those owned in Queensland.  The measure got shelved because other state governments refused to cooperate.  Many state governments have increased land tax rates for investors, with larger increases for overseas investors and investors leaving properties vacant.

State governments, especially those of the "progressive" variety, have also made life difficult for property investors in a number of other ways.

Arguably the balance of tenancy laws has been shifted unreasonably in favour of tenant protection, despite bad tenants often costing landlords large amounts of money.  In particular, it has become increasingly difficult and time consuming for landlords to remove bad tenants (e.g. those who don't pay their rent, damage the property, engage in anti-social behaviour).  A number of jurisdictions have moved to also force landlords to accept pets (potential damage by dogs being the big issue).

Landlords value long term tenants and don't like the expense and vacancy associated with tenant turnover.  Consequently they don't generally seek to needlessly remove good tenants.

Changes to income tax law have also penalised landlords.  From 1 July 2017 property investors could no longer claimtravel expenses incurred while inspecting, maintaining or collecting rent from rental properties.  While this might be defensible in the case of some routine matters, it even prevented landlords affected by recent floods from claiming travel expenses, when major damage affected their properties.  From 1 July 2017, new rulesalso abolished deductions for second-hand depreciating assets in residential rental property, so that landlords now generally cannot claim a deduction for what is a real and genuine cost.

Successive state and territory governments of all varieties have also failed to rein-in stamp duty charges on property transfers (except in the case of concessions for first home buyers).  Penal rates of stamp duty are a deterrent to potential landlords and potential owner-occupiers alike.  The problem has been a near complete failure over decades to index stamp duty tax thresholds for inflation.  A look at existing thresholds (e.g. for NSW) shows the first three stamp duty thresholds for properties to be $14,000, $32,000 and $85,000 (what can you buy at such prices these days?), while most houses now attract stamp duty rates of 4.5 to 5.5 per cent. 

The by-product of all these changes is that it has become a lot more expensive and a lot less desirable for people to invest in real estate.

There has been a steady increase in investors selling their properties since 2014, and a significant drop in new investors entering the market.  This has reduced the supply of rentals.  The pandemic worsened these shortages as people relocated out of capital cities and took on second homes.  By making it more expensive for investors to hold residential property, governments have reduced the supply of rental stock.  Instead landlords are leaving the rental market in favour of investing in shares or superannuation, which are more favourably treated in income taxation, exempt from stamp duty, are less book-keeping intensive, and are low care investments.

Landlords generally are fed up with being demonised by begrudgers (people who resent others that have achieved wealth or success).  Fingers are commonly pointed at so-called wealthy landlords, "money hungry" developers, selfish baby boomers etc.  Some even try to manufacture a battle between landlords and tenants in order to justify policies like rent control that have never worked.  (Nobody ever suggests assistance for landlords, when rents are low or falling, or when interest and other costs are skyrocketing.)

The reality is that the Mum and Dad landlords with one or a handful of properties, who dominate the landlord class, are mostly thrifty people.  They saved more of their lifetime earnings and bought investment property, while their contemporaries spent nearly all of theirs on a more lavish lifestyle, including new cars and overseas holidays.

Investors in housing are not stupid.  If governments make life too hard for them, they will go elsewhere with their money, and are increasingly doing so.  If fewer people want to be landlords, it is unlikely that state and territory governments (given already high and rising public debt levels) will be able to make up the difference by building more public housing.

Watch out for further rent rises, and feel sorry for those that don't own their own residence.