In recently published research, the Australian Housing and Urban Research Institute (AHURI) documents what is firming as a structural decline in access to home ownership.

There are multiple factors behind this.  A long period of low interest rates following the GFC saw a sustained climb in housing prices.  Also relevant is the rise of precarious employment even amongst moderate and high income earners.  The cost of housing has risen with mandated and market driven improvements in quality, referencing the infrastructure incorporated into new neighbourhoods as well as the features and facilities built into dwellings.  Shifts in the spatial economy have been another significant influence in the home ownership recession.  The in-board drift of higher paying jobs across all Australian metropolitan areas has lifted the scarcity premium on well-located housing.

Households are therefore having to spend more time, if not their entire housing careers, in rental accommodation.  The proportion of households in private rental tenure is now nudging one third.  Close to half of these households have been renting for a decade or more.

Private rental is no longer a transitional tenure as households move inexorably towards the Great Australian Dream.

This trend represents a worrying disruption of what had come to be seen as a corner stone of Australian egalitarianism.

Households frustrated in their desire to achieve home ownership would see themselves unfairly denied the intrinsic benefits of the tenure – security and continuity of occupancy and the option to put down roots in a community.

They will also be at a serious tax disadvantage.  Homeowners enjoy tax free capital gains on their property, as well as preferential treatment in means-tested access to pensions and various government benefits.  While mortgage interest is not tax deductible for home buyers, they are not required to pay tax on imputed rent for the entire duration of owner occupancy.

This means otherwise identical households will pay different amounts of tax over a lifetime depending on whether they own or rent their home.

Devising policy responses to this situation which are both fair and non-distortive of markets is an intimidating challenge, not least because the tax treatment of home ownership is untouchable.  A good place to start, however, is to improve the efficiency of market supply of housing.  At the margin, this will give more households a shot at realizing the Dream.

Policy also needs to recognise that private rental housing is now a long term option for an increasing proportion of households.  Renters deserve the right to make their house their home.  Their ability to develop a career, get a good education for their kids and develop supportive community relationships ought not be at the whim of their landlord.  These outcomes are difficult to achieve in a rental sector which is best characterized as a cottage industry.  More than 70% of landlords own just one dwelling.  And many landlords are accidental, falling into this role as result of inheritances, work moves or other ad hoc domestic drivers.

There is a clear case for better definition of tenant rights and consumer protection in the rental sector.  There is also scope to improve professional management of rental properties, given the evidence that many landlords gain less than satisfactory returns from their investments (see https://longview.com.au/whitepaper-private-renting-in-australia-a-broken-system ).

Rapid expansion of the Build to Rent sector, as occurred in the UK with supportive government policy, is also warranted.  Long term institutional investment in BtR would provide a stable supply of high quality, professionally managed rental housing in locations close to jobs and services.  The Interim National Housing Supply and Affordability Council has mapped out a detailed reform agenda to promote BtR in Australia.  This includes a national convention on defining BtR as a regionally significant land use to enable more efficient development assessment, improving market information about the financial performance of BtR and adjustment of superannuation regulation rules to recognize the particular attributes of these assets with heavy up-front costs and a long tail of returns (see https://nhsac.gov.au/_assets/downloads/barriers-to-institutional-investment-report.pdf )

More generally, there is now a pressing need to expand options for marginal home buyers, those that cannot resort to the so called ‘bank of Mum and Dad’ and, indeed, those for whom rental tenure is preferred for career or personal reasons.  Shared equity, ground lease schemes and co-build arrangements have a part to play.  So do rental co-operatives.  Finding ways of levelling the playing field for these ‘alternative’ tenures, so that their tax disadvantage vis a vis home owners is mitigated, should be a focus.

By Dr Marcus Spiller, Principal & Partner, SGS Economics & Planning

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