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Landlords selling equals first homeowners buying

Oh no, landlords will sell their dwellings. This is terrible news for renters!

If I hear this nonsense one more time…

A housing math lesson

There are about 10.8 million dwellings in Australia and we add about 160,000 new dwellings to the stock each year.

Of those 10.8 million homes, about 3.6 million are owned by landlords and rented in the private market. The rest are owned by homeowners or are public housing.

If landlords never sell, there will always be at least 3.6 million private rental homes, even if the stock of homes increases over time.

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.

It is rarely noted that landlords not buying new homes, or landlords selling existing homes, both have the same effect of shifting the pattern of ownership. They are equivalent ways to shift the composition of ownership of the housing stock.

This would be much more obvious if we lived in a world where one person owned all the dwellings — the way to increase homeownership in this world is for this one owner to sell some of their dwellings to renters. But the maths doesn’t change because there are millions of landlords.

To boost homeownership back to its 71% peak level that Australia saw in the early 1970s would require over 500,000 landlord sales in net terms — whether that is landlords not buying new homes or selling their existing homes.

That’s about a year’s worth of normal turnover (sales) in the housing market. It would take nearly a million of these landlord sales to get us to 75% homeownership.

The private rental sector constantly changes

It is also worth remembering that property owners buy and sell rental dwellings all the time. Dwellings often change from owner-occupied to rental, or vice-versa, even without a sale, when homeowners move in and out of a property they own.

Only about half of the dwellings in the private rental sector (PRS) are still being rented five years later, as the below table from this report shows. The rest have been sold to owner-occupiers, or their owners have moved in, or they have been redeveloped and not rented.

In fact, about a quarter of rental dwellings are removed from the rental stock when a tenant leaves, as the below charts show.

Every year, a huge number of homes also enter the rental market. The below charts show that in Sydney, the share of new rental bonds for dwellings that have never been rented before has been rising from about 25% of total new tenancies to 35%, while for Melbourne the churn into the rental market has been consistently higher than that.

But what about renters?

None of this ownership churn affects the supply, or stock, of dwellings. This is because a former renter who buys a home is now also no longer a renter — it’s a minus one from the supply and a minus one from the demand for rental housing, as the below diagram describes.

Even if a first home buyer creates a newly formed household, coming from previous homeowning households and not directly from the rental sector (like young adults moving out of a family home), this still removes the demand for housing from those people, regardless of where they would have alternatively been housed.

If you don’t believe this housing math, we can directly check whether landlord sales as a share of all sales is predictive of rental increases using the chart below, where I have matched CoreLogic data on landlords (investors) as a share of new sale listings and SQM Research data on asking rents for Australia’s capital cities.

Until mid-2021, the relationship was negative — a higher proportion of landlord sales was related to lower rental growth. Perhaps that’s because investors sell more when rents are falling.

After a clear cyclical change in the second half of 2021, the same negative relationship is there in the last two years of data.

Overall, this data doesn’t provide any evidence for the idea that more landlords selling is related to higher rents. Which is exactly what we would expect based on the simple housing math I discussed above.

It should be a puzzle that so many people can’t do this simple math and seem to want both more homeownership and more landlords and rental housing. Sure, build more homes. But increasing the ratio of homeownership to rental out of the stock of homes means changing ownership patterns, and that means landlords selling on balance.

 

Dr Cameron Murray is an Economist and co-author of the Book Game of Mates. Subscribe to his written work at Fresheconomicthinking.substack.com. This article is general information.

 

18 Comments
Steve
August 19, 2023

A landlord selling means one less house to be rented out. OK it may be a current tenant buys the house. But it also may mean one less house will be built (the purchaser of the sold house is no longer in the market for a new house). The presumption that construction is totally immune to the level of demand from investors seems the key mistake in this analysis. You simply cannot lower the investment from the supply side and leave demand constant and argue nothing will change. By the numbers above about 35% of housing is rented, so we can assume about 35% of new housing goes to landlords. Or about 55,000 of the 160,000 new homes. Drop new home construction to 105,00 and redo the maths.
Blind Freddy can see we have a supply problem with housing yet we still have economists arguing less investment (or making investment less attractive which equates to the same end game) is not an issue. If I hear this nonsense one more time......!

ross
August 23, 2023

Fact Check, Victoria relies on private property & landlords (landtax, stamp duty, fire service levy, insurance duty, rates, development tax, windfall tax etc.. ) for 52% $32.5 Billion of its income ( pay teachers, nurses, police, politicians, firefighters, public transport etc.. If as predicted ~ 35% of landlords/ investors leave the market How to recoup the lost $ billions? taxes on principal place of residence / higher rego / payroll tax/ work cover fee / public transport/ mileage tax ect…! Reduce landlords? be careful what you ask for…

Lachlan
August 19, 2023

As a landlord, and with Victorian property I see this in a simple way. If i am fed up with the extra costs placed on the ownership of my property and decide to sell, then there is one less investor in the market. But, the property might be bought by another investor, so nothing changes. If the property is bought by an owner occupier, maybe a first home owner, then the current tenant is kicked out into a smaller market. It is populist politics to blame the greedy investor, and my response is now to put up the rent when i can just to cover the risk of either rent freezes or yet another tax or charge. The same thinking stops other investors from entering the market. As is repeated in many of the comments, there is just not enough supply and that needs to be remedies both publicly and privately.

Peter
August 10, 2023

Article does not explain what will happen after all landlords that are going to sell, actually sell? Maybe this take a few years to play out. And with less home investors their will be less new properties purchased for rent - this probably happening now and will accelerate as investors desert the sector. Needs to be a continuing supply of homes, as population grows etc

Peter
August 10, 2023

Article seems to assume that renters that could not get a loan in the past now would NOW qualify for a loan with higher rates and tighter loan qualifying criteria

Paul
August 09, 2023

The writer is making the assumption that the purchasers are currently renting. What about the people who have moved back home to live with their parents because they can't afford to rent. There is not a space opening up for other renters in that situation

Kathryn L
August 08, 2023

The point, not clearly articulated, is that apparently some people worry that if investors are offloading their rental properties (presumably due to the cost of holding, ie interest rates), then renters will have nowhere to live, because the properties will be sold to owner occupiers. The idea is that people who don't qualify for a home loan will be more tightly squeezed than those who do. I think he author is trying to say that in this "great investor sell off" that surely some of the buyers will be people moving from renting to owning. Presumably sales prices would drop to match rents, incentivising those who qualify for a loan but didn't want to take out a mortgage to finally take the plunge. Which it always does. But how much?
Rental yield is generally appalling all round at present. And yield on high density strata might look good until you take strata fees into consideration. Is a couple paying $750pw rent really going to "take the leap" to pay $1400pw mortgage plus council rates, water rates and insurance? I don't think many will. At this point you'd expect prices to fall... However the federal government has migration on full steam ahead, so prices are guaranteed to grow, as construction cannot meet increased demand.
The only advice I can offer is rent-vest like me. Buy a house that will grow and rent an apartment that's more pleasant to live in.

Jennifer
August 08, 2023

The suburbs of Australia where built by the Housing Authority for the poor /returned veterans
to live with there with family and work to better lives in the 50s 60s and 70s then they stopped. Those homes in some suburbs have not changed but sell for a million dollars because of the land they sit on.
The Units they built 3 story high scatter the city's sold individually now to anyone rich enough to afford them. Sad state of affairs...

B2
August 08, 2023

Thinking aloud :
If we banned all building for rentals then why is the Fed giving incentives for 'Build to rent' ? According to the author the housing maths tells us this is pointless because it just crowds out first home owners. He has assumed supply does not increase with the extra demand for building rentals.
Furthermore, less demand for new building due to banning of 'build to rent' or 'buy to rent' should reduce supply unless building costs drop from the demand reduction in which case more owner occupier building occurs. This assumes the building industry has spare capacity to do this - doubtful ATM.

What should matter is what happens at the margin i.e. will incentives from Govt. cause extra building supply. Probably. Then as per the author's implied solution, we should ban buying existing housing to rent. However this creates more potential issues eg. those who built to rent will have to sell to a smaller secondary market, a FHO cannot rent out their place after building if they wanted to live with parents first to save up, existing landlords will be selling to a diminished market.

Anas
August 08, 2023

And what are you trying to prove here again? I'm just a little confused after reading the whole piece...

John N
August 21, 2023

I agree. Lots of text but to no end point. The issue is really the cost of housing. Mortgage Rates are not the problem if the transaction price of housing was reasonable. Why are housing transaction prices the problem....this most likely cause is that all levels (regardless of political alignment) of government who for appx the last 50 years have failed to manage the affordability of the housing market for all levels of Australians. On top of that we have the added problem of the recent levels of Immigration that is adding fuel to this fire. This is about as dumb as it gets.

Alex
August 06, 2023

If Government implements new policies which reduces the returns of landlors. Such as mandating various inspection services, making it harder to move on dodgy tenants, rent price controls, extra land tax and long periods where rent cannot be increased. With all those factors, is it not basic economics that either prices need to fall or rental yields need to rise (or combination) to offset the hit to returns on capital? In Melbourne, where all those examples I listed are not far off reality, surely that means existing supply will need higher yields? Or your argument is that impact on society overall is neutral because some people move off rent into now relatively cheaper ownership?

Andy R
August 05, 2023

Wouldn’t this model need updating? Assumption is all long term usage of dwellings is swapped equally. If you have net gains in short term stay across extended periods (ie AirBnB) this exchange is between renter and FHB is being disrupted.
Love to hear your thoughts.

Paul
August 04, 2023

Landlords would be inclined to sell if they were not getting a free kick from negative gearing and CGT concessions---tax minimization for the "haves" and well heeled. If the government really wanted to help home buyers ---.

Terry
August 08, 2023

There really isn't much incentive when it comes to negative gearing. Although I do think it could be restructured to be held only as an offset to future positive gearing. CGT concessions are given to all investment types. To take it away from housing would necessitate it's abolition completely.

BeeJay
August 10, 2023

Negative gearing is usually only applicable for the first few years. Then as the rent rises, it surpasses the cost of the interest. Of the place is boight at times of high interest then positive gearing my occur even quicker. Capital gains tax isn't applicable until the place sells so for long term landlords it isn't even a consideration. It would affect house flippers more. The same negative gearing capital gains tax rates occur when one borrows to but shares, or one borrows to buy a business. Having owned a property for 20 years, it has been positively geared for 14 of the last 15 (because of one tennant trashing/destroying it). For those 14 years, I have been paying tax on it which means other tax rates can be brought down such as income tax. Capital gains tax, haven't had to even think about it. Negative gearing isn't really much of a bonus after the first few years but can allow someone on a modest income to enter the market. Capital gains tax only applies when you sell it.

Steve
August 04, 2023

I actually had a lot of trouble understanding what was the whole point of this article?

Ron
August 06, 2023

I am of the same opinion, Steve, but then again the author is an economist, and a room full of economists will never be unanimous in their analysis. The simple fact is we have to rely on Landlords for housing supply, never mind that way back in the 70s, housing was more affordable before greedy councils and governments took advantage of developers who passed increased costs on to the new home buyer, thereby new buyers were up for bigger deposits, meanwhile needing a residence to rent while saving, enter the landlord.
In the meantime, State governments reduced their stock of housing commission stock, now instead of reinvesting to assist the people, it is easier to make all the soothing noises and call the "Greedy Landlords" out and talk about imposing rent restrictions and taking control of their property out of their hands and placing it in the hands of Tenancy Boards etc. The biggest risk, and governments are aware of this, is that landlords will sell their stock, so less residences on the rental market. Yes, we are landlords, owning several as our source of income, not a greedy one if there is such an animal, and have had the same tenants for a long time now, and one family who rent one of our houses will never own a home and are quite happy to rent as they like to travel and other nice things in life. To each his own.

 

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