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Abstract
The private rental sector (PRS) is growing in many advanced economies due to declining home ownership and retrenchment in social housing. This paper examines changes in the PRS in the context of housing market change and ongoing urbanisation processes. Using the example of Australia, it identifies a paradox when examining detailed changes in PRS composition between 1996 and 2011. Increasing demand from higher and lower income households has occurred alongside increasing concentration of supply in mid-market segments. The paper discusses possible explanations of this mismatch. It suggests that middle/higher income households rent through a mixture of constraint and choice in areas with a high level of amenity, adding to understanding of gentrification of inner-city areas. Urban restructuring, evident in increased land values in inner areas of large cities, has resulted in limited ‘filtering down’ of older housing into low-rent private rental stock and a concentration of investment in supply in mid-market segments with greatest prospects for resale and rental.
Acknowledgements
The authors would like to thank Margaret Reynolds, Swinburne University, for assistance with the tables and figures and three anonymous reviewers for their helpful comments. The authors would like to acknowledge the Australian Housing and Urban Research Institute Ltd. (AHURI) which provided funding for the purchase of customised ABS census data which is the basis of this article. This article is based on original re-analysis of this data, and the analysis and interpretation are those of the authors.
Notes
1. See the 2010 special issue of the International Journal of Housing Policy for details.
2. In the 20 years to 1995, real house prices in Australia increased by an average of just over 1 per cent per annum. In contrast, the average annual increase between 1996 and 2011 was almost 8 per cent. In the 4 years since 2011, real house prices have increased at an average annual rate of around 2.5 per cent (with price growth in Sydney being almost double this).
3. A possible future exception to this are dwellings constructed under the now-defunct Australian Government’s National Rental Affordability Scheme which provided financial incentives (tax offset or direct payment) to investors in new property to rent at 20 per cent below market rents for a period of 10 years. At the end of 10 years, those dwellings not owned by community housing providers are likely to exit the social rental system and may become part of the private rental stock.
4. By definition, the number of households and number of occupied private dwellings are identical in the Australian census. An imputation methodology was employed to replace missing values and to assign point estimates for income from the categorical information reported. Details of the methodology employed can be found in Wulff et al. (Citation2011).
5. Income inequality in Australia is marginally above the OECD average (http://www.oecd.org/social/income-distribution-database.htm). Because wealthier households have tended to own the better located dwellings, spatially disparate increases in dwelling prices have added to other trends that have contributed to a widening gap between those at higher end of the wealth distribution compared with those at the bottom.
6. Based on confidentialised unit record data from the 2011/12 ABS Survey of Income and Housing (that closest to the 2011 census), less than 7 per cent of renter households owned a residential rental property other than the one in which they were living compared with 17 per cent of owner-occupiers. Over 70 per cent of these had incomes in the top 40 per cent of the (equivalised disposable) income distribution (compared with 64 per cent of owner-occupiers with rental properties).
7. ABS Housing Finance Australia, Cat. No. 5609.0, table 11. Between 2011 and 2015, housing finance commitments to investors continued to rise. They doubled in real terms over this period, and the investor share of total housing finance commitments exceeded 50 per cent before regulatory constraints on lending to investors were implemented in 2015.
8. Skaburskis (Citation2006) provides both an overview of some of the historical literature on filtering and clear evidence that its failure (as a result of gentrification pressures) helps explain the loss of the low-cost rental stock in Canada’s major metropolitan areas. He concludes (p. 554) ‘in growing cities, filtering is now contributing to housing problems, not solving them’.
9. Since the mid-1990s, expenditure on alterations and additions has amounted to approximately 40 per cent of total capital investment in new housing (ABS, Australian System of National Accounts, Cat. No. 5204.0, table 2).
10. By 2011, although most private rental dwellings were still owned by small-scale individual investors owning one or two properties, there was increased activity by self-managed superannuation funds, enabled by regulatory changes, and by foreign investors, about whom there is little information. Self-managed superannuation funds are vehicles regulated by the Australian Tax Office through which small numbers of people invest for their retirement instead of using industry or private superannuation funds. Income earned by the fund, other than through capital gains, is taxed at a concessional rate of 15 per cent, and capital gains are taxed at 10 per cent. Non-recourse borrowing is permitted for property investment and capital gains are tax-free once the fund reaches its pension, or payout phase.
11. These first home investors may be making a rational investment decision. The Australian tax system makes it advantageous for high-income households with little housing equity to be renter owners rather than owner-occupiers. Once equity has built up and the benefits of non-taxed income (from both rent and capital gains) as an owner-occupier offset the benefits of interest deductibility as a landlord, it becomes rational for such households to shift from being a landlord to becoming an owner-occupier of their property.