The nationwide rental shortage crisis may appear to be a Covid phenomenon, but it’s something many in the property investment arena saw building for a long time.

Years of constant changes to real estate investment regulations and taxes have pushed many investors out of the market, with the current shortage of properties for tenants the result.

The past five years have been arduous for residential property investors, as all levels of government fail to deliver sufficient social housing, forcing tenants to rely on rental properties owned by private investors to provide somewhere to live.

Despite that reliance on the private investment market (which provides over 90% of all properties occupied by tenants), governments of all levels have continued to interfere in the market and use property as a cash cow, hitting it time and again with levies, fees and charges, as well as legislative changes that have disadvantaged and discouraged investors.

The process is continuing with new legislation in several states, including Queensland and Western Australia, which add to the disincentives to investor owners.

Not only do the state laws increasingly disadvantage landlords, but investor owners pay higher rates of interest, stamp duty and council rates than owner-occupiers. But the biggest losers are people who need to rent or choose to (around a third of Australian households rent), because the resultant shortage is pushing up rents.

One of Australia’s leading real estate analysts Simon Pressley says: “You can’t expect to reduce the price on rental demand, by squeezing the life out of those you supply it.”

But the biggest crisis is not the cost of rental homes, but the chronic shortage of them.

This situation is a direct result of decisions by politicians and bureaucrats, who are the real villains of this saga.

It started in 2017 when the banking regulator, Australian Prudential Regulation Authority (APRA), clamped down on interest-only loans in a bid to cool the then hot property market.

It restricted the percentage of interest-only loans, which were popular with investors, to 30% of a lender’s business and said a 10% benchmark for growth in investor lending was appropriate.

That same year the Federal Government changed depreciation rules, which significantly affected how much an investor could claim in deprecation on second-hand properties.

Under the changes if the property had been previously owned by someone else, investors could only claim depreciation on the actual building not the fixtures and fittings – a significant reduction in what investors would have previously been able to claim.

Despite the new rules which disadvantaged them, many investors persisted until the lead up to the 2019 Federal Election when the Labor Party announced it would scrap negative gearing and make adverse changes to Capital Gains Tax arrangements if it won power.

It was enough to significantly dent the confidence of many property investors, who sat on their hands while the election campaign was fought out as there was so much uncertainty about what the rules would be going forward.

Labor lost that election and subsequently promised not to touch negative gearing, but investors remained nervous about what the next attack might be.

Little by little changes have been made by all levels of government, particularly by state governments, which makes residential property a less attractive investment prospect.

It’s little wonder investors jumped at the opportunity to sell up when property prices boomed at the start of the Covid pandemic. More investors sold than bought during the recent national property boom.

The steady exodus of investors – coupled with material shortages and surging construction costs which has prompted developers to cancel or defer major projects – means Australia is now staring down the barrel of a massive undersupply of properties for rent.

Both Domain and SQM Research report that the national vacancy rate is 1%, but most postcodes across Australia have vacancies well below 1% – when 3% is considered a balanced market, 2% is considered a shortage and 1% is regarded as a crisis.

The latest Lending Indicators from the Australian Bureau of Statistics show the number of property investors active in the market in June fell by 6.3%.

Atlas Property Group director Lachlan Vidler said investors now comprised 33.8% of mortgage demand by value, with a recent peak of 35.75% being recorded in April, and a record low of just 22.9% during 2020.

“Back in 2017, targeted lending restrictions were put in place that prevented investors from accessing lending, which resulted in the supply of rental properties starting to contract,” he said.

“Investor confidence only started to improve about a year ago, but now that rates are rising and borrowing capacity is being assessed at interest rates well above market projections, many are once again unable to secure finance.”

While many are quick to label investors as greedy wealthy individuals, that grossly misrepresents the situation and totally misses the point, according to Property Investment Professionals of Australia (PIPA) chair Nicola McDougall.

“The demonisation of property investors seems to be a national sport in Australia when more than 70% of investors own just one property, hoping to simply improve their financial situation in retirement,” she said.

“It is an uncomfortable truth for some that the present rental crisis is predominantly a result of investor inactivity over recent years, which is hardly a sign of ‘greed’ when markets have been booming like never before.”

State Governments seeking a quick fix to rental market issues have introduced a raft of new changes in the past two years – all them likely to make the shortage worse.

The Queensland government introduced new legislation which removed the right of property owners to end a periodic tenancy simply by providing notice.

It has also introduced a new way of calculating land tax which takes into account investment properties also owned in other states and ramps up the land tax bill of investors substantially.

Real Estate Institute of Queensland CEO Antonia Mercorella has labelled it, “a slap in the face” to the one sector which was propping up the economy.

“This treatment of property investors as an endless money pit is outrageous – the Government is raking in a huge stamp duty windfall, then relying on private investors to provide the lion’s share of housing supply, and now they’re slapping investors yet again with new taxes,” Ms Mercorella said.

Meanwhile, the Greens in South Australia have proposed legislation to allow temporary portable homes to be built on vacant private land, where the owner is unwilling or unable to undertake development.

In South Australia, Queensland and elsewhere across Australia, the Greens have also called for a cap on rental increases. This would make the real problem, the shortage, worse.

Property Council SA director Daniel Gannon said instead of focusing on rent caps and additional property taxes, the government should be trying to increase supply.

“If there are projects in the pipeline or parcels of land that require rezoning or approval, they should be an urgent priority to get shovels in the ground and affordable apartments in the sky,” he said.

The Real Estate Institute of Western Australia (REIWA) has warned proposed changes to the state’s residential tenancy laws would plunge the region deeper into a rental crisis. A Synergies Economic Consulting survey of 7,000 investors revealed 61% would sell up if the proposed major changes were adopted.

The proposals include removing the right of a property owner to evict a tenant without grounds and would allow tenants to do modifications without approval from the property owner.

In the ACT Attorney-General Shane Rattenbury released a public exposure draft on proposed changes to the ACT’s rental laws with the most significant change the end of termination without grounds.

In New South Wales, regional mayors are calling for owners of holiday homes to put them on the permanent rental market to combat the current housing crisis while the Greens MP introduced a private member’s bill to cap rents.

To add further to the imposts on investors, the Federal Government introduced new fees at the end of July which effectively double the charges for foreign investors in Australia. This, too, will make the shortage worse by discouraging foreign investors and adversely impacting the viability of new apartment developments.

Property Council of Australia chief executive Ken Morrison said it sent a message that investors were not welcome here.

“We should be welcoming foreign investment with open arms, not sending the opposite message by doubling these fees which are already much larger than our competitors and apply to far more transactions,” he said.

Many forget that landlords were forced to bear the brunt of those who couldn’t pay their rents during Covid and were unable to remove them as a result of moratoriums on eviction.

TIMELINES

MARCH 2017 – APRA introduces lending restrictions for residential property investors

NOVEMBER 2017 – Federal government changes depreciation legislation to remove some of the claims by investors

APRIL 2019 – Labor’s proposed abolition of negative gearing and changes to capital gains tax revealed.

MARCH 2020 – NSW introduces changes to rental laws to make it easier for victims of domestic violence to end a lease.

MARCH 2020 – NSW landlords must ensure their rental property meets seven minimum standards to be ‘fit for habitation’; rents can only increase once a year and tenants are allowed to make minor modifications without the owner’s approval.

JANUARY 2021 – Northern Territory introduces changes to allow tenants to keep pets in rental properties.

MARCH 2021 – Victoria introduces new laws banning rent bidding and introducing new minimum standards to be introduced over coming years. These include fixed heaters and curtains and blinds. Renters can make some modifications to their homes with approvals. Agents or rental providers must pay renters compensation for sales inspections.

JULY 2021 – COVID rent and eviction moratorium introduced.

OCTOBER 2021 – Queensland passes new laws which will progressively introduce several changes including ending leases in a case of domestic and family violence, allowing tenants to have pets, changing the rules for ending tenancies; repair orders; and introducing minimum standards.

OCTOBER 2021 -APRA increases the serviceability buffer used in banks’ loan assessments to at least 3%.

MARCH 2022 – NSW Covid renting laws extended until 30 June 2022 giving landlords greater ability to increase rent and, in some circumstances, to terminate impacted lessees’ tenancies.

MAY 2022 – Interest rates start to rise

JUNE 2022 – Qld government introduces changes to land tax legislation which takes investment properties in other states into account when calculating land tax.

JUNE 2022 – Northern Territory removes COVID 19 rental restrictions.

JUNE 2022 – South Australia Greens push to cap rental increases at CPI and allow landlords to only lift rents every two years.

JUNE 2022 – Brisbane City Council says it will increase council rates by 50% for investor owners who use short-term rental platforms like Airbnb.

JULY 2022 – ACT introduces draft bill to end no-cause evictions, banning rent bids and strengthening minimum standards for rental properties.

JULY 2022 – Foreign investment fees increased

JULY 2022 – Mayors in Blue Mountains and Eurobodalla call for investors who own holiday homes to open up to permanent rental.

JULY 2022 – National Rental Affordability Scheme (NRAS) begins to be progressively wound up.