Why?…because successive Governments’ inability to find ways to address the shortage of housing, the failure of the NRAS scheme to date and its subsequent ‘capping’ and the rising limitations to entry to the property market means that there is only one solution for the almost one third of the population that rent to find adequate housing – the individual property investor.
One of the many advantages of being a property investor in Australia is that the Government recognizes the need for private investors to contribute to the rental pool and provides incentives by the way of depreciation and other tax rebates. Over 30% of the population already rent and with the decline in entry affordability likely to see this increase to over 40% in the next 15 years or so, the Government needs private investors to add to supply more than ever.
Many of previous government policies have done little to increase supply and deliver affordable property. For example, the First Home Owners Grant and the ‘Boost’ in 2009 attempted to increase supply by providing additional incentives for those individuals who built or bought new properties. Unfortunately this is a ‘demand’ side solution to a ‘supply’ issue and the effect was to create demand clusters (groupings of high demand in specific areas) driving up prices and not necessarily adding to supply only making affordability worse.
The National Affordability Rental Scheme (NRAS) was supposed to be a panacea for the undersupply and declining rental affordability which, like many other Government schemes, fell far short of its desired outcome. Property investors were to be provided additional tax credits for delivering a new rental property to market and accepting a rent below the current market value. 100,000 new properties were to be added to supply with affordable rentals for those who serve the community such as police, ambulance offices, teachers and the like. We spent six months investigating the scheme for our clients and decided not to proceed due to concerns around continuity (even the banks wouldn’t accept the rebates as income), asset protection (we believed it would be social housing, not affordable housing and built in ‘clusters’), location (affecting capital growth), true value in the construction price and real ‘nett wealth effect’ of the property (the true effect of the tax benefits v income v expense v capital growth). All of our concerns have been realized and other analysts suggest that most people who took up the scheme would have invested in new property anyway so the actual expected addition to supply from 100,000 properties under the scheme would be only be around 10,000. In the wake of the floods the Prime Minister, Julia Gillard, capped the scheme at just 35,000. While it was touted that funding was required to be reallocated to the flood reconstruction, it might also have been an opportunity to squash a failing scheme and save face at the same time.
As the ANZ Bank said in January “The absence of a coordinated political commitment to mobilize the supply-side of the housing market suggests continued exacerbation of an already record dwelling shortage.”
So if the Government can’t come up with a solution that works then what does that mean for property investors? Firstly it means that the tax benefits will continue (Treasury modeling suggests the cost to the country would be far greater if the Government had to provide the subsequent shortfall in property if the incentives were removed) and secondly, that there is no short term answer to the undersupply issue. We see this is key to underpinning a strong property market and placing upward pressure on rents and prices into the future. All of this on the back of a very strong outlook for the Australian economy means good news for the property investor.
That said, the world has changed and investing in this new era will be much more complicated than it had been in the past, yet this shows that there are always great opportunities to be found – so where are you looking?