As we head into a federal election on 3 May, the usual debate about negative gearing and capital gains tax has raised its head.
With the nation in the midst of a rental crisis, a sensible approach to rental reform – whether that’s tax settings or tenancy legislation – is needed. Otherwise, we risk losing more investors from the market, deterring potential investors, and perpetuating the current situation.
We know investors are sensitive to legislative change. In Western Australia we’ve seen the impact this can have on the market.
For example, the Covid rental legislation enacted in 2020-21 was deeply unpopular with investors. It came after a long market downturn in which rent prices declined significantly and vacancies were high.
While other factors also came into play, this policy, and potential changes to the Residential Tenancies Act, played a role in a mass exodus of investors from the market in a fairly short period of time. This reduced rental supply by nearly 9 per cent, or 20,000 properties, and contributed to the rental crisis of the past few years.
You can also see the result of legislative change in other states, such as Victoria, which has reduced land tax thresholds for investors as part of the Covid debt levy and introduced strict regulations for landlords, including high compliance requirements.
According to the Homes Victoria Rental Report for the September 2024 quarter, the number of active bonds in that state declined by 3.6 per cent, or nearly 25,000 properties, between September 2023 and September 2024.
Respondents to a recent REIWA housing survey indicated changes to property taxes (83 per cent) would influence their decision to sell their investment property.
While changes to capital gains tax and negative gearing were often cited as deterrents by investors, land tax was also a concern. One investor noted they recently sold a tenanted property as their land tax had increased from $12,500 to $28,000 in three years.
Almost three quarters (74 per cent) of respondents said changes to legislation would influence their decision to sell their investment property.
One respondent commented they had recently sold two investment properties due to over-governance. Another said changes to the Residential Tenancies Act had seen them sell three investment properties in the past five years.
Changes to property taxes (82 per cent) and changes to legislation (62 per cent) would also deter potential investors.
Property investors ‘will exit the market’
Investors are often vilified, but we all need to remember they provide an essential service. About 85 per cent of rental properties are provided by private investors. While some own several properties, according to ATO data, about 71 per cent own one, with 19 per cent owning two.
Until there is another way of providing enough rental properties to meet demand, we need to have balanced and stable policy settings that support existing investors and encourage new investment.
The current improvement of the WA rental market is due to an increase in new supply.
While WA’s relatively affordable housing and the potential for strong rental yields have played a key role in attracting investors, particularly those from the Eastern States, so too has our more moderate legislative environment.
Another review of our Residential Tenancies Act is expected later this year or early next year and the Western Australian government cannot afford to be complacent when it comes to future rental reform.
WA’s population is still growing and rental supply has not returned to its previous high. The feedback from investors is clear. They can and will exit the market if they have concerns about legislation and we could very easily find ourselves facing the same challenging conditions experienced over the past few years.
At the federal level, political parties need to carefully consider changes to tax settings or any form of rent controls and the potential effect on the constrained rental markets across the country.
