Population growth through current projected numbers will surely add more renters and owner/occupiers, which seems the core issue when it comes to affordability and availability.
Insufficient stock for the projected ludicrous population growth means demand and prices rocket.
Then there’s the 1M vacant homes on the night of the last census.
A better policy rather than converting rentals to owner occupiers and reducing overall rental stock may be that areas with rental availability lower than 2% outlaw airbnb or equivalent rentals and only allow periodical rentals in that area in the short term.
Duh, scarcity increases absent a huge crash in house prices which is bad for a totally different reason. Say you have 3.5 million homes in the rental market and 4 million people looking for homes. Then 2.5 million of them become owner occupied. You now have 1 million rentals and 1.5 million looking for a house say you add another 100,000 so there are now homes for 2/3 people looking to rent ïas opposed to 7/8. Then add in say 50,000 new home hunters from kids moving out and say 350,000 from immigration. So previously you had an undersupply where there were enough homes for 87.5% of renters now there is an undersupply where there is only enough homes for 57.8% of renters. Now what makes it worse is that many of those remaining renters don't have the financial capacity or credit capacity to buy a home so now almost half of all people renting are homeless. Now would you rather have a 42.2% chance of being homeless or a 12.5% chance. The less stock the higher the prices supply and demand. If 12.5% of people can't get what they need the scarity price rise is smaller if 40% can't the scarcity price rise is higher basic math!
The math works only if immigration stops then one renter is a new owner. If immigration continues and no new supply, then who cant save to buy a house is getting in bigger trouble as new immigrants may be able to outbit who is an old renter. Supply is the solution, not overpriced ownership. It will create a massive bubble and bubbles will pop one day.
'The most extreme way to increase homeownership without landlords selling is if only first-home buyers bought all the new homes. You could even call this approach an “investor ban on new housing”, which is something that people think is very bad.
Let’s go through this scenario. In ten years, if the recent level of new housing construction continues, there will be about 12.4 million dwellings in Australia. But there will always still be those same 3.6 million dwellings owned by landlords that exist today.
So the best we can do is go from 66% to 72% homeownership over a decade, assuming an investor ban on new homes has no effect on how many new homes are built.'
Poor assumption on balance s vs d. If it was in balance the price would be at equilibrium. Now there are more people looking to rent than rental available. Hence rents going up. With your simple math this equals to for example 10 people looking and 4 dwelling available. So the ratio d vs supply is 2.5. now let's remove 1 tenant and 1 dwelling. We have now. D vs S ratio of 3 (9/3). While it's still 6 ppl that can't find rent, the ratio D vs S is a measure of the competition among renters which is what pushes the rent up.
It's simply math that mostly ignores other effects. My anecdotal impression is that Home owners will typically purchase a *larger* house than they need, while renters will rent a house only as large as necessary. I would suspect this means that on average, homeownership reduces the supply, since you have people "future proofing" with large houses (thanks to very large transaction costs associated with buying/selling real estate).
I'm not inclined to do the research on this right now, but it seems dubious to assume that its a 1:1 relationship when owning vs renting, as we don't have 1 person living in a home - the average household size is more like 2.5, and shifting this up or down will have a huge effect on the apparent supply of housing. Homeownership could well be a less efficient use of housing, if people hang on to large houses as they age or buy bigger houses than they need (compared tor renting, where people will be quite inclined to pay for as little house as they need)
As to how this would affect rents - its hard to say, since there's so many different levers affecting the rental market pointing to any single factor and saying that is causing most of the effect is unlikely to be accurate.
That might be true in theory, but in the Sydney market, you buy what you can afford in the best place you can live and afford and make do (4 kids and counting in a 3 bed house).
“So the best we can do is go from 66% to 72% homeownership over a decade...”
It is obvious that increasing homeownership and increasing rental supply are two goals that are at odds with one another. But why come down on the side of home ownership being the desirable outcome? To my mind, many of our supply crises around the world are rooted in “home-voters” (as in the book by Fischel) preferring policies that make the value of their homes go up.
A society with more renters is a society with more voters who care about enacting policies in the best interest of renters. If anything, continuing to pursue the goal of widespread homeownership is at odds with the goal of abundance and affordability.
Hi Cameron, the logic does fall down to the extent that previously investor-owned and permanently rented properties are not taken up by owner-occupiers who were previously renting in the same market area.
For example, they may be taken up by people who use it as a holiday home or at least a property they only use for part of the year. Common in high amenity areas that people like to visit at particular times of the year.
There is also the issue which I think may have happened more during the Covid pandemic, e.g. previously non-resident Australian citizens returning to live in a home purchased from an investor who had previously rented it out - again no reduction in Australian rental demand but lost rental dwelling stock.
Particular geographic areas may also be affected by similar migration within Australia, i.e. in-moving owner occupiers take up formerly investor-owned properties, removing rental dwelling stock without reducing local rental demand. Again, this is something that seems to have happened more in parts Queensland, for example, during the pandemic.
I understand the loss of rental dwelling stock, through changes such as above, may have been a contributing factor to the low vacancy rates and rental increases experienced in the last couple of years. Of course, increased overall demand through reduced average household sizes during the pandemic and now increased migration have been the major factors involved.
I have not done the detailed research for evidence in each of these respects, but these are examples of circumstances that depart from your logic of each new owner-occupier being one less renter.
Property lobbyists make these arguments all the time. Here's the executive director of the Property Council in Victoria commenting on an increase in investor land taxes:
“The temporary land tax hikes risk having the side effect of reducing rental supply in the market, leading to upwards pressure on rents at a time when affordability is critical.”
Worse, some economists embed this idea in models. Hidden in model language the error is harder to spot.
For instance, the Henry tax review said that "since owner-occupied housing is exempt, land tax on residential investment properties is probably passed through to renters as higher rents". The argument (p250) is based on similar logic to the "investor sales increase rents" claim.
Re: the Henry review conclusion: to re-establish equi-marginality (as you put it) after introduction of an investor land tax must necessarily occur by way of investor sales to owner-occupiers.
And upon such a reduction in the rental stock how could one imagine rents would rise if not for an assumption that rental demand had not fallen?
The only plausible interpretation on my reading is that the Henry review author imagines an investor land tax inducing lower rental supply (by reallocation of homes into owner-occupancy), while forgetting that this also induces lower rental demand (by reallocating tenants into owner-occupancy).
Freebairn's paper does exactly that in a graph.
Which is why I said that the same error of logic that is the subject of Cameron's column also finds its way into economists' models.
You would be correct if the supply of housing was fixed.
But if it's not fixed, taxing investors will have two effects: increasing the overall cost of housing as well as changing the composition of occupiers/renters.
How do you think the Property Council exec in the first quote imagines the tax reducing supply, if not by way of investor sales?
It's a temporary tax and she refers to "a time when affordability is critical". The most plausible interpretation is that she is alluding to investor sales.
Landlords and the real estate management industry really do believe that they are doing renters a favour, as if owning an investment property is some altruistic civic duty 😹
I think it was the Victorian real estate institute or some such came out criticising AirBnB owners for creating the rental crisis and encouraged them to consider long term rental options instead (they spun it as though they were concerned about renter welfare but really they are concerned with all those potential management fees they’d add to their books since property management fees are any real estate agency’s bread and butter).
Compelling logic and data as usual, Cameron. Thx. I think the real issue with landlord economics deteriorating is they are probably less likely to buy (and therefore finance) new build and therefore stock growth is lower. Curious if the data shows any correlation there. Evan T
Population growth through current projected numbers will surely add more renters and owner/occupiers, which seems the core issue when it comes to affordability and availability.
Insufficient stock for the projected ludicrous population growth means demand and prices rocket.
Then there’s the 1M vacant homes on the night of the last census.
A better policy rather than converting rentals to owner occupiers and reducing overall rental stock may be that areas with rental availability lower than 2% outlaw airbnb or equivalent rentals and only allow periodical rentals in that area in the short term.
Duh, scarcity increases absent a huge crash in house prices which is bad for a totally different reason. Say you have 3.5 million homes in the rental market and 4 million people looking for homes. Then 2.5 million of them become owner occupied. You now have 1 million rentals and 1.5 million looking for a house say you add another 100,000 so there are now homes for 2/3 people looking to rent ïas opposed to 7/8. Then add in say 50,000 new home hunters from kids moving out and say 350,000 from immigration. So previously you had an undersupply where there were enough homes for 87.5% of renters now there is an undersupply where there is only enough homes for 57.8% of renters. Now what makes it worse is that many of those remaining renters don't have the financial capacity or credit capacity to buy a home so now almost half of all people renting are homeless. Now would you rather have a 42.2% chance of being homeless or a 12.5% chance. The less stock the higher the prices supply and demand. If 12.5% of people can't get what they need the scarity price rise is smaller if 40% can't the scarcity price rise is higher basic math!
I swear with some work commercial office blocks could be converted to rental accomodation.
No big construction required. Much faster turn around and problems solved.
If the demand for housing is being generated by overseas arrivals i think they might have a demand to live in central business districts….
Just a thought bubble, given commercial property is in a bit of a crisis.
Immigration growth adds to rental demand. Acutely. Especially with the type of immigration favoured by government policy.
International students don’t buy houses - they rent. Why isnt the federal government constructing enough student accommodation to house them?
Temporary workers - again don’t buy houses they rent.
Why aren’t businesses who want temporary workers building employee accommodation?
If the industries that want temporary workers/customers were as a condition made to provide housing for them?
Well you would have a sustainable level of housing demand that could be met by the private market.
I’m sure some of the above is done. But clearly not to the extent it needs too.
The math works only if immigration stops then one renter is a new owner. If immigration continues and no new supply, then who cant save to buy a house is getting in bigger trouble as new immigrants may be able to outbit who is an old renter. Supply is the solution, not overpriced ownership. It will create a massive bubble and bubbles will pop one day.
There always needs to be some demand to encourage construction.
If you look to Victoria, high investor land taxes has led to lower median home prices and a higher rate of owneroccupiers.
It has other negative consequences but clearly encouraging investors to sell and owner occupiers to buy doesn’t necessarily mean higher home prices.
Victorian rents haven’t skyrocketed compared to elsewhere either. Its just the price people are willing to pay has dropped
Some great thoughts and data here - in particular
'The most extreme way to increase homeownership without landlords selling is if only first-home buyers bought all the new homes. You could even call this approach an “investor ban on new housing”, which is something that people think is very bad.
Let’s go through this scenario. In ten years, if the recent level of new housing construction continues, there will be about 12.4 million dwellings in Australia. But there will always still be those same 3.6 million dwellings owned by landlords that exist today.
So the best we can do is go from 66% to 72% homeownership over a decade, assuming an investor ban on new homes has no effect on how many new homes are built.'
Poor assumption on balance s vs d. If it was in balance the price would be at equilibrium. Now there are more people looking to rent than rental available. Hence rents going up. With your simple math this equals to for example 10 people looking and 4 dwelling available. So the ratio d vs supply is 2.5. now let's remove 1 tenant and 1 dwelling. We have now. D vs S ratio of 3 (9/3). While it's still 6 ppl that can't find rent, the ratio D vs S is a measure of the competition among renters which is what pushes the rent up.
It's simply math that mostly ignores other effects. My anecdotal impression is that Home owners will typically purchase a *larger* house than they need, while renters will rent a house only as large as necessary. I would suspect this means that on average, homeownership reduces the supply, since you have people "future proofing" with large houses (thanks to very large transaction costs associated with buying/selling real estate).
I'm not inclined to do the research on this right now, but it seems dubious to assume that its a 1:1 relationship when owning vs renting, as we don't have 1 person living in a home - the average household size is more like 2.5, and shifting this up or down will have a huge effect on the apparent supply of housing. Homeownership could well be a less efficient use of housing, if people hang on to large houses as they age or buy bigger houses than they need (compared tor renting, where people will be quite inclined to pay for as little house as they need)
As to how this would affect rents - its hard to say, since there's so many different levers affecting the rental market pointing to any single factor and saying that is causing most of the effect is unlikely to be accurate.
That might be true in theory, but in the Sydney market, you buy what you can afford in the best place you can live and afford and make do (4 kids and counting in a 3 bed house).
I think people purchase what they can afford. In many instances rental yields are much lower on large homes.
“So the best we can do is go from 66% to 72% homeownership over a decade...”
It is obvious that increasing homeownership and increasing rental supply are two goals that are at odds with one another. But why come down on the side of home ownership being the desirable outcome? To my mind, many of our supply crises around the world are rooted in “home-voters” (as in the book by Fischel) preferring policies that make the value of their homes go up.
A society with more renters is a society with more voters who care about enacting policies in the best interest of renters. If anything, continuing to pursue the goal of widespread homeownership is at odds with the goal of abundance and affordability.
Hi Cameron, the logic does fall down to the extent that previously investor-owned and permanently rented properties are not taken up by owner-occupiers who were previously renting in the same market area.
For example, they may be taken up by people who use it as a holiday home or at least a property they only use for part of the year. Common in high amenity areas that people like to visit at particular times of the year.
There is also the issue which I think may have happened more during the Covid pandemic, e.g. previously non-resident Australian citizens returning to live in a home purchased from an investor who had previously rented it out - again no reduction in Australian rental demand but lost rental dwelling stock.
Particular geographic areas may also be affected by similar migration within Australia, i.e. in-moving owner occupiers take up formerly investor-owned properties, removing rental dwelling stock without reducing local rental demand. Again, this is something that seems to have happened more in parts Queensland, for example, during the pandemic.
I understand the loss of rental dwelling stock, through changes such as above, may have been a contributing factor to the low vacancy rates and rental increases experienced in the last couple of years. Of course, increased overall demand through reduced average household sizes during the pandemic and now increased migration have been the major factors involved.
I have not done the detailed research for evidence in each of these respects, but these are examples of circumstances that depart from your logic of each new owner-occupier being one less renter.
"Oh no, landlords will sell their dwellings. This is terrible news for renters!"
Can you give some examples of people saying that? (Preferably respected people not some random joes on Twitter).
It sounds so stupid it's hard to believe someone saying it seriously.
Property lobbyists make these arguments all the time. Here's the executive director of the Property Council in Victoria commenting on an increase in investor land taxes:
“The temporary land tax hikes risk having the side effect of reducing rental supply in the market, leading to upwards pressure on rents at a time when affordability is critical.”
https://www.theage.com.au/national/victoria/will-the-8-6-billion-tax-slug-really-only-hit-the-top-end-of-town-20230524-p5day4.html
Worse, some economists embed this idea in models. Hidden in model language the error is harder to spot.
For instance, the Henry tax review said that "since owner-occupied housing is exempt, land tax on residential investment properties is probably passed through to renters as higher rents". The argument (p250) is based on similar logic to the "investor sales increase rents" claim.
https://treasury.gov.au/sites/default/files/2019-10/afts_final_report_part_2_vol_1_consolidated.pdf
Here's another example from John Freebairn (Figure 2):
https://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0004/2505559/pb2017n02.pdf
Same logic plus model language equals same mistaken conclusion.
That's not the same argument.
The first quote implies that the tax will reduce supply, and says nothing about selling.
The second quote is simply equi-marginallity.
Both of those claims are not necessarily true, but are at least plausible, and follow directly from basic economic principles.
Re: the Henry review conclusion: to re-establish equi-marginality (as you put it) after introduction of an investor land tax must necessarily occur by way of investor sales to owner-occupiers.
And upon such a reduction in the rental stock how could one imagine rents would rise if not for an assumption that rental demand had not fallen?
The only plausible interpretation on my reading is that the Henry review author imagines an investor land tax inducing lower rental supply (by reallocation of homes into owner-occupancy), while forgetting that this also induces lower rental demand (by reallocating tenants into owner-occupancy).
Freebairn's paper does exactly that in a graph.
Which is why I said that the same error of logic that is the subject of Cameron's column also finds its way into economists' models.
You would be correct if the supply of housing was fixed.
But if it's not fixed, taxing investors will have two effects: increasing the overall cost of housing as well as changing the composition of occupiers/renters.
I would be correct about what? Your answer is so terse as to be unintelligible.
We're discussing what the Henry review authors and John Freebairn assumed. In particular, did they make the error of logic described in this post?
I argue they did. What is your reading of their arguments and models?
You say "The only plausible interpretation on my reading is that the Henry review author imagines an investor land tax inducing lower rental supply"
I disagreed with that and provided my rational: this reading is the only plausible one only if one assumes fixed supply.
How do you think the Property Council exec in the first quote imagines the tax reducing supply, if not by way of investor sales?
It's a temporary tax and she refers to "a time when affordability is critical". The most plausible interpretation is that she is alluding to investor sales.
Perhaps you're right, but I'll give the benefit of doubt here.
Even temporary taxes can have long term chilling effects, not to mention they can easily become permanent.
Respected by some and an effective lobbyist and general doom monger, Antonia Mercorella, CEO of REIQ:
https://www.eplace.com.au/lifestyle/reiqs-rental-reform-campaign
Thanks
Landlords and the real estate management industry really do believe that they are doing renters a favour, as if owning an investment property is some altruistic civic duty 😹
I think it was the Victorian real estate institute or some such came out criticising AirBnB owners for creating the rental crisis and encouraged them to consider long term rental options instead (they spun it as though they were concerned about renter welfare but really they are concerned with all those potential management fees they’d add to their books since property management fees are any real estate agency’s bread and butter).
In a way they are doing a favor.
Renting is often much cheaper than owning.
It doesn't justify political rent-seeking of course.
Really it a symbiotic relationship, without tenants most individuals couldn’t afford a second property.
In what sense is this property really "theirs"?
If it's mortgaged to the bank, and used by the tenants.
Compelling logic and data as usual, Cameron. Thx. I think the real issue with landlord economics deteriorating is they are probably less likely to buy (and therefore finance) new build and therefore stock growth is lower. Curious if the data shows any correlation there. Evan T