You can’t have rental properties without investors

The Federal Government has flagged potential changes to capital gains tax concessions as part of the broader housing affordability debate. The focus is on improving access to home ownership and reshaping incentives within the housing market.

But there is a critical omission in this discussion.

Renters.

While much of the debate centres on house prices and investor tax settings, renters, and the rental supply they depend on, have largely been absent from the conversation. Yet renters are currently experiencing the most acute pressure in the housing system. Investor policy cannot be separated from rental outcomes. The two are directly linked.

If investor participation falls, rental supply tightens. When rental supply tightens, rents rise. The mechanism is straightforward.

Housing markets respond to incentives. Changes to capital gains tax concessions are designed to alter investor behaviour. That is their purpose. But investor behaviour determines how much rental housing exists. Rental housing in Australia exists because investors buy it. Almost every rental property in the country is owned by an investor.

When investor purchases slow, the pipeline of rental stock slows with them. Unlike owner occupiers, who buy to live in a property, investors buy to provide rental housing. If they retreat from the market, fewer properties are added to the rental pool.

At a time when vacancy rates remain tight and rental growth has been strong, any policy discussion that affects investor participation must consider rental supply consequences. Rental affordability is not separate from investor policy. It is a direct outcome of it.

In policy debates, rental housing can be treated as though it simply exists, rather than being actively provided by someone.

In Australia, that “someone” is overwhelmingly small, private investors, often referred to as “mum and dad” investors. These are households who typically own one or two properties, frequently as part of retirement planning.

The data shows that individual investors own the vast majority of rental properties in Australia. Institutional or Government ownership remains a very small share of total stock. Private investors have also carried most of the burden in expanding rental housing over time.

This structure matters. It means changes to taxation, regulation or holding costs do not affect a marginal group, they affect the core of rental supply.

Historically, private investors have funded and purchased the majority of new rental dwellings. Without this cohort, rental supply growth would have been materially lower. If policy settings discourage participation from this group, there is no alternative system currently operating at scale to replace them.

Victoria provides a useful example of how investor taxation settings shape housing outcomes.

In recent years, Victorian property investors have become the most heavily taxed in the country. Additional land taxes and other measures have significantly increased holding costs. The impact has been measurable.

Investor participation has fallen and rental listings have declined. As holding costs rise and confidence weakens, some investors exit while fewer new investors enter.

Capital is mobile. When returns are compressed in one jurisdiction, it shifts elsewhere - to other states or into different asset classes. The consequence is not theoretical. Rental supply contracts.

Over the past five years, Melbourne highlights the divergence between price outcomes and rental outcomes. House prices have increased by approximately 20 per cent. Over the same period, rental prices have risen by 34.9 per cent. Rents have significantly outpaced capital growth.

Higher taxes on investors have contributed to slower price growth relative to other markets. From a buyer perspective, that moderation may appear positive. But for renters, the outcome has been very different.

While price growth has been restrained, rental growth has accelerated. Higher holding costs, reduced investor participation and fewer new rental properties have tightened supply. When supply tightens in the context of ongoing population growth, rents rise. Home owners have experienced slower capital gains while renters have experienced faster rental increases.

If housing policy is intended to improve affordability across the system, the distributional outcome in Victoria suggests renters have not been the beneficiaries.

Build-to-rent is frequently presented as an alternative to reliance on private investors. Institutional capital funding purpose-built rental housing has a role to play and the development pipeline is strengthening.

However, scale and timing matter. Even with a significant number of projects underway, build-to-rent will account for approximately 0.58 per cent of total rental stock in Melbourne for many years to come, and even less in Sydney. That is not insignificant in isolation, but it is negligible in the context of total rental demand.

Institutional development operates over long timeframes. Planning, financing and construction cycles extend over years, and it would take decades of sustained expansion for build-to-rent to materially alter national rental supply. It is a complementary model and is not a substitute for private investors.

Housing affordability, whether for buyers or renters, ultimately comes back to supply. If population growth continues and housing supply does not keep pace, prices and rents rise. If investor participation slows while rental demand remains strong, rents rise even faster.

Policies designed to alter investor incentives must account for their supply impact. Reducing returns or increasing costs may slow price growth in some segments, but if it also reduces rental stock, renters bear the adjustment.

Encouraging more investment in new housing, particularly new dwellings, increases rental supply. Discouraging participation reduces it. If the objective is to improve rental affordability, the policy focus must be on expanding supply.