Monday, June 15, 2015

The inferiority of renting

Debates about housing affordability in Australia are clouded by the belief that renting is an inferior substitute to home ownership. Renters are all just home owners who haven’t made it yet.

Sadly, this leads to the debate ignoring the very real and beneficial option of improving tenant’s rights in order to improving affordability for renting households as well.

Our collective ignorance leads to loud calls to cut stamp duties, the government fee on property transfers, because they are economically inefficient. They make it costly for homeowners to relocate via selling and buying in a new location.

But stamp duties are only inefficient in a world of homeownership, and even then there are alternatives.

  1. Don’t sell your home, rent it out. Then rent a home in a new location. 
  2. Just rent in any location if you have a highly mobile career.

For some reason these perfectly legitimate alternatives are considered inferior. Who would someone rent if they could buy? And shouldn’t we make it easier for homeowners to buy and sell as they please?

What we then ignore is that prices are being set not by the homeowner market, but by investors who time their purchase and sale decisions in order to capitalise on the land value cycle. Cut stamp duties, and we are also giving this group a free lunch, even though they are the ultimate beneficiaries of high prices, while future homeowners bear the costs.

But what if renting wasn’t inferior? What if tenants had greater rights and obligations? Maybe in a ‘renter society’ like Germany and Switzerland, where the majority of households rent, the debate about housing affordability and stamp duty would be very different.

Maybe the policy options would look at lot more like what we see in Germany - greater rights for tenants including limits on rental increases and higher capital gains taxes. Removing stamp duty in order to improve household mobility is a second best alternative to better tenant rights.


  1. Interesting post, Cam, and, yes, people could move and rent out their own homes and rent elsewhere if they need to move for work.

    I'd note our tax-transfer system is biased in favour of home ownership due to no taxation of imputed rents and capital gains and exemption of the family home from the pension assets test. So the tax-transfer system biases us towards home ownership, although other factors are obviously relevant in the choice between buying and renting.

  2. Nice post.

    I would just point out that increasing renters' rights doesn't come without a cost. An increase in rights should increase the dollar cost of renting relative to home ownership, no? Can/do Australians negotiate their rental terms? I could imagine a contract where only the renter had the right to break the contract. Do you think the default rental terms are wide of the mark?