Like it or not, it’s happening – the trend away from home ownership towards long-term renting is gathering pace. So with the first Rudd/Swan budget under our belt, how will the trend play out and what are the implications for property investors?
At present we have unprecedented levels of tax-free lump sum grants available to first-home buyers and the imminent addition of the Enhanced First Home Saver Account, which will offer a low-tax special bank account for home buyers.
Far from improving the affordability crisis, all these measures in play at the same time will push prices ever higher and keep many aspiring home buyers in the rental market much longer. This will put further upward pressure on rents. In addition, the Government will now use private and institutional investors to solve the rental affordability crisis – this generation’s version of public housing – by providing tax incentives for investors to purchase purpose-built housing that will be rented to low and middle income earners.
Even while investors may be smiling in the short term, the long-term impact stands to irrevocably alter how investors build wealth through property and interact with the marketplace. Significantly, with fewer Australians owning homes, property investors will find it increasingly difficult to build the equity required to leverage into other investments.
While home ownership has traditionally been perceived as shelter and the right of every Australian, it has also become the chief path to equity building and personal security in retirement.
So what happens next for property investors? I believe that too many DIY investors already have too much exposure to Australian listed shares. There needs to be more balance in DIY portfolios and property is often underweight.
While existing property investors will reap the rewards of continuing growth and stronger yields as a result of demand pressure in the short term, this very growth will force more and more investors into the government-sponsored “second-tier” of generic, limited growth and capped income sector. In addition, with aspiring home buyers forced to remain in the rental market for unprecedented lengths of time, we could see our overall standard of living drop as a direct consequence of falling net equity levels.
These second-tier investors will need to own more properties (paying more stamp duty revenue, etc) to accumulate a successful retirement fund. What’s more, many more tenants will be forced into bland, high-density developments offering compromised standards of living.
If properties that come on stream via the National Rental Affordability Scheme are designed to accommodate low and middle-income tenants then, by definition, owners will only be able to sell to other investors, and there may even be explicit resale restrictions in these contracts of sale. In fact, at face value, this would seem mandatory if the supply of rental accommodation is to be maintained.
As a result, second-tier property investors will effectively be limiting their access to future buyers. These investors are likely to be at a perennial disadvantage over those who can afford to invest in the free private market.
The solution to the affordability crisis and the trend towards renting and subsequent impacts surrounding declining levels of personal equity are far from simple, but there are straightforward measures that really will help, as politically unpopular as they will be.
- Eliminate all lump-sum state and federal grants in favour of a tax-exempt first home saver scheme with no ceiling on the amount that can be accumulated in those accounts.
- Make investment and financial literacy core subjects in secondary education and undergraduate courses.
- Regulate non-bank lenders to ensure appropriate and prudent lending practices.
I dislike ultimatums at the best of times, but we’re unequivocally faced with one right now. Sort the mess out, or today’s perceived “crisis” in home ownership personal equity levels and rental affordability will look like a teddy bear’s picnic 10 or 20 years hence.