How is the complexity of this problem impacting businesses and investors navigating transaction and investment structures or seeking to attract essential resources, alongside a challenging construction market? Will the May Federal Budget bring any changes to announcements made in October?
Australia’s housing market saw price rises of almost 25 per cent in 2021 with record high growth continuing into June 2022. Monetary policy to combat growing inflation saw interest rates rise quickly in the back half of 2022, impacting property values and rounding out the year with a 5.3 per cent decline in values across the country according to CoreLogic. While the start of 2023 shows some month-on-month fluctuations, it’s too early to call an end to the downturn particularly in the volatile economic environment we find ourselves in, with uncertainty around interest rates and no slowdown in the need for more housing in sight.
Lack of affordable housing, further impacted by the building and construction sector’s ability to deliver in a high cost and resource constrained environment, limited land supply, reduced investment activity and time-consuming government approval processes to get housing completions, are particularly impacting the rental market with the national rental vacancy rate on a downward trajectory. This has caused the steepest rent rise in Australian record, with the average rent increasing by 17.6 per cent for units and 14.6 per cent for houses during 2022 according to Domain, and it hasn’t slowed.
The housing shortage is also a significant issue for business and is impacting their ability to attract resources. Many businesses (and regions) are attributing worker shortages to the difficulty of finding affordable housing within reasonable commuting distance. So there is much interest in how the rental challenge, alongside the housing shortages will be addressed in the upcoming budget. While it may be plugging gaps in the labour market, the Albanese Government’s ‘Big Australia’ immigration policy will only put further pressure on rents and housing demand.
What action can Government take?
We’ve yet to see any tangible movement on the announcements made in the October 2022 Federal Budget around the Housing Accord. Whilst some see further investment into Labor’s Housing Australia Future Fund is needed per year to keep up with the growing demand, it is clear to many that immediate action is needed as there is a lead time to every solution. In the meantime, many families are being put under significant financial stress to keep a roof over their heads, while interest rates and the cost of living have kept rising.
Beyond the existing First Home Loan Deposit and now expanded Home Guarantee Schemes, capital gains tax and duty concessions, and other policies in place to support buying homes, tax policies that encourage more home-owners to become landlords and incentivize affordable accommodation offerings should be considered as supply solutions. Build-to-Rent concessions, negative gearing and land tax exemption programs for sites put to appropriate use, are clear examples of successful policies that can encourage investors back into the residential rental market to increase supply and relieve pressure on renters.
The Government’s announcements ahead of next week’s Federal Budget release will assist with attracting investment into housing supply – having now matched the withholding tax rate for foreign investors in residential ‘build-to-rent’ properties with the 15 per cent payable by those investing in other property classes (after 1 July 2024). Alongside this, the increased depreciation rate for eligible new build-to-rent projects (from 2.5 to 4 per cent) will also provide an incentive for domestic investors, encouraging further investment in build to rent assets and adding to housing supply.
While this is welcome news, nervous renters are also keen to see further regulation around tenancy arrangements including secret rental bidding, restrictions on rent increases, tightening policies around evictions, longer lease terms and portable bond schemes. These steps can go a long way to relieving the financial burden of moving homes and support stability in living circumstances, particularly for lower income families. The tighter tax policies that began to appear for residential housing investors from 2015, also need a rethink in the current market, to encourage more new housing supply.
Outside of Australia, there are multiple examples of government support that have successfully incentivised global investment and firmly established Build-to-Rent as a sought-after asset class. According to the National Housing Finance and Investment Corporation (NHFIC), this includes policies aligned to guarantees, enduring subsidies, or public and private loan intermediation. The UK and the US are clear standouts in driving investment from large institutional investors in residential product and there is much we can learn from other similar markets.
We look forward with hope to the May Federal Budget as housing supply and affordability is finally getting the bandwidth it needs as a key policy focus – and now with some urgency. While it is early days, the first meeting of industry specialists appointed to the interim National Housing Supply and Affordability Council has occurred. We hope this brings some fresh ideas and recommendations for early wins to Government ahead of the budget, to efficiently unlock new housing supply.
Overall, the rental crisis in Australia is a complex problem that requires a multifaceted approach to solve and is dramatically shifting the bar as to who is above and below the poverty line. The obligations and opportunities for property owners and investors will change based on reforms introduced by both State and Federal Governments to address the current housing crisis. Responsibility for the key issues of land supply and approvals generally sits squarely with the States and local councils, so a collaborative approach is required. To what extent the Federal Government can influence these decisions is simply a wait and see at this point.
To help you navigate the complexities of compliance for both domestic and foreign investors, tax- and transfer duty-efficient transaction and investment structures and leverage tax incentives unique to your organisation, please don’t hesitate to reach out.
