At the recent federal election, once again the two major parties paid lip service to the wicked problem of sharply falling housing affordability.
Young Australians are disproportionately represented in the group of population not able to buy or rent a suitable house in comparison to other OECD countries, with more than 50% of low-income earners in rental stress.
In the last three months, the Reserve Bank of Australia has raised interest rates three times bringing the cash rate to 1.35%, a rise of 0.5% on the 6th of July, with warnings to expect at least two more such major rate hikes in the coming months.
Rising inflation on the back of high fuel, energy and grocery bills, a tightening monetary policy, coupled with a fall in real wages and tighter bank lending criteria, are likely to worsen housing affordability irrespective of any reduction in house prices.
Worsening the crisis is the limited housing stock in Australia coupled with the rapid increase in the cost of construction brought on by decimation of the global supply chains and shortage of skilled labour.
Some of the largest Australian home builders and many smaller builders have gone into liquidation, which is likely to increase the cost of new housing and further limit housing supply.
At the same time, the existing housing stock has been criticised as being often not fit for purpose, old, and unable to cater to the demands of the cash-strapped population looking for quality housing, close to employment centres, transport, lifestyle amenities and available for long term lease.
There is also a dearth of affordable housing for the economically disadvantaged.
The 2016 census data found that the number of lone person households in Australia is on the increase while the number of family households decreased, bucking long established trends of family housing.
All these factors will continue to amplify the impact of the housing stock shortfall.
Any method to improve housing supply could increase housing affordability by making long-term rentals attractive for renters and landlords and alternatively freeing existing poor-quality housing stock for redevelopment.
The development of the build-to-rent (BTR) model in the UK is reported to provide one such solution to this crisis.
This model uses the financial power of large corporations and institutional investors in developing high-quality, moderate to high-density housing, along with affordable housing in the mix.
Such housing is built to rent out on long-term leases to renters providing them with stability and housing security.
State governments in NSW, Victoria and Queensland have demonstrated an interest in this model and are making tax concessions available to BTR developers.
To encourage BTR projects, the NSW government in August 2020 granted a 50% reduction in land tax, and till 2040 refund/exemption from surcharge tax, refund/exemption from additional duty levied on foreign buyers.
From January 2022, Victoria offers a 50% land tax concession for up to 30 years, and exemption of foreign purchaser additional duty, as well as exemption from Absentee Owner Surcharge during construction of the project.
The Victorian government has also established an Industry working group and advisory committee to better understand BTR.
At the same time the Queensland government announced a BTR pilot project.
At this time, there is no tax advantage or other concessions granted to BTR developers by the Federal Government.
Such tax concessions are miniscule in comparison with the support available for BTR in the UK: a government-run BTR fund of more than £2 billion; a private rented sector guarantee scheme, with support for affordable housing in the mix; no VAT for development; and stamp duty savings.
These tax concessions reduced about 6% of BTR developers’ costs in 2019, making such projects financially viable.
Macquarie Asset Management considers that the UK and Australian markets are similar in that the existing rental housing supply is often of poor quality, does not offer security of tenure, or purpose designed amenities.
The demand by the Millennial generation and generation Z for such properties is on the increase, particularly since the great Australian dream of a ‘quarter acre block’ is unattainable for many.
While the US market aims the BTR model to supply premium rentals, the UK government has supported the BTR model with a view to creating affordable housing in the process as well.
The lack of government support, coupled with supply chain driven inflation, may well result in BTR projects not remaining financially viable for large corporations and institutional investors looking at the BTR model as a new asset class.
Will this sound the death knell for BTR in Australia? Or despite federal government support and limited state government support, will the sector become a boutique investment and not live up to its potential in helping improve housing affordability in Australia.