By Johari Amar & Lynne Armitage*
Australians desperately need more affordable homes, particularly homes for rent. The prospect of home ownership is rapidly receding for many people, especially younger generations (as the chart below shows). More people than ever are being forced into a tight rental market.
Making things worse, many traditional providers of residential rentals, the “mum and dad” investors, are selling their investments to take the capital gains.
Adding to the demand for housing, households are getting smaller. The estimated shortfall of homes needed to house new households will be nearly 165,000 by 2032. An extra 20,000 dwellings a year need to be built to avoid that housing deficit.
So what can be done to provide more housing that households can afford? One emerging idea is build-to-rent developments.
Build-to-rent generally involves developing residential accommodation with a view to it being a long-term investment offering long-term homes for renters rather than home buyers. These developments are usually units and townhouses, owned by an institutional investor.
Our research project is investigating the opportunities to improve housing affordability in Australia. We have found broad agreement among leading players in the build-to-rent sector that these developments are affordable when the rent generated is right for both the households and developers. But there’s a catch: our interviewees considered the rents affordable only because they are set at a reasonable cost for their target group, middle-to-upper-income households.
So this “reasonable cost” is a market perspective. And most current build-to-rent developments are a premium product in city-centre locations. As one person in state government explained:
“It’s a market process and they do their due diligence and they work out that there’s sufficient people who can pay what they need to pay and people who are perhaps willing to pay a premium for a better product and some greater security of tenure, because they know that it’s going to be continued to be offered as a rental. The landlord’s not going to go, ‘I want to move in’, or sell it.”
Signs Of Momentum In Australia’s Build-To-Rent Sector@MSCI_Inc https://t.co/plDy5CPygc pic.twitter.com/Ldjt7w5mgV
— Infabode (@Infabode) December 1, 2022
So where does this leave low-income renters?
Build-to-rent is well established overseas but relatively new to Australia. Unsurprisingly, there is still no single definition of exactly what it means, especially as an affordable housing option.
For example, a recent study analysing 685 media articles and housing industry reports suggested build-to-rent may not be what it seems. It might be just another way for investors to make financial gains while masquerading as a solution to the critical shortage of affordable and social housing (available at below-market rents).
It’s not yet clear whether built-to-rent will be an effective solution for people who most need affordable housing. They include low-income and vulnerable households, and those with special needs.
With this in mind, we interviewed 26 leading practitioners (CEOs, chairs of boards, national directors and state government departmental directors) across the field of affordable housing and build-to-rent in Australia to collect their views on what it is.
We found the market perspective is at odds with the needs of lower-income households. It’s quite different to the welfare approach to housing, which focuses on the needs of those with lower incomes. Many households in the bottom 40% of incomes are suffering housing stress as a result of spending more than 30% of their income on housing (known as the 30:40 affordability indicator).
To make inroads into the housing affordability crisis, built-to-rent developments will need to provide homes to all, including those falling under the 30:40 indicator, not only to the relatively wealthy.
Over the life of the NHHA, #housing affordability has deteriorated especially for private #renters. About 1 in 5 low-income households are left with less than $250 after paying their weekly rent. More in our report: https://t.co/4LpUcPcHZq
— Productivity Commission (@ozprodcom) September 29, 2022
Can build-to-rent help solve the affordable housing crisis?
Participants agreed build-to-rent developments can ease the affordability crisis. To support lower-income households, however, they said incentives, via tax concessions and inclusionary zoning, will be needed.
Tax concessions provide incentives to develop affordable housing by, for example, offering land tax credits. Inclusionary zoning either mandates or creates incentives so a set proportion of a development is affordable housing. The incentives typically include changes to development controls and planning standards and processes to reduce costs and obstacles to build-to-rent developments.
How, then, can we ensure built-to-rent delivers housing that’s affordable for all households? Our analysis points towards two main conclusions.
First, a legal or statutory definition of “affordability” in relation to build-to-rent should be established. This will allow better framing of the sector’s role in a national housing strategy. As a CEO with 40 years of experience in policy development and the provision of social and affordable housing told us:
“[Build-to-rent] settings are acutely hampered by the fact that we don’t have a national housing strategy, therefore, nobody’s really bothered to resolve the difficult issues about the definition […] that will put housing costs basis into a frame that says, is it reasonable, is it suitable, is it affordable and, once you paid for it, can you afford a reasonably decent standard of living?”
A national housing strategy should allow development of tiers of build-to-rent housing. Each tier would match the level of risk and return within a given section of the spectrum of housing types and tenures. So, these tiers represent both levels of rent and a range of housing types – high-rise, low-rise, townhouses etc.
The aim is to deliver diverse housing options with a focus on affordability and universal housing (designed to meet residents’ changing needs over their lifetime).
A senior economist overseeing nation-wide research into housing and mixed-use development said:
“So we could potentially look at a grade A BtR [build-to-rent], grade B, grade C BtR asset classes and in different locations. We need to be working more towards different kinds of BtR asset classes, like they have in the USA, UK and Canada.”
This approach will help make build-to-rent developments more predictable, replicable and scalable to match varying levels of affordability. And that will help create the confidence and enthusiasm the sector needs to produce better affordable housing outcomes.
*Johari Amar, Lecturer in Property, Bond University and Lynne Armitage, Associate Professor of Urban Development, Bond University. This article is republished from The Conversation under a Creative Commons license. Read the original article.
49 Comments
Of course the devil is in the detail with renting and landlords. But in general if a landlord is providing a warm, dry, habitable rental for the long term (no intent to sell) that is affordable for the tenants whilst profitable for them then this is a genuine market service that the landlord is providing. Which is much better than the speculative capital gains housing business model that some landlords have.
Also depends on what is defined as affordable. Say rents have to drop 30% to be defined as affordable, maybe the Government legislates this. Then you have the issue of Landlords who bid up the price of housing using cheap leveraged debt, rent no longer provides sufficient cashflow.
- Why is the Landlord's debt everyone elses problem?
- Why did the Landlord need to over-extend to purchase a house that already existed? Was this a "genuine market service" or a rush of paper rich people looking to lock as many young people into renting as they can?
My petition now presented to Parliament and more investigative work being done as we speak;
Also of interest, Salvation Army presents the numbers and their associated costs with respect to our current housing crisis - really worth a read;
https://www.salvationarmy.org.nz/article/tales-trenches-realities-housing-new-zealand
When you actually, really give it some thought, the mere idea that a landlord can take any more than 30% of a household's income is pretty ridiculous. And it's not even necessarily out of greed, but moronic investment decisions where many have borrowed up to 100% of purchase price with the tenants effectively backed into a corner expecting them to just hand over ever increasing sums of their discretionary money to make the numbers work. And that's just normalized?
It's all well and good to say supply/demand will balance it out eventually, but that means nothing to the folks currently in emergency and transitional housing. The numbers are astronomical - over $3 billion in these emergency accommodation grants over the past 5 years - and that doesn't include expenditure on accommodation supplement (which is $2 billion plus per annum and rising) or transitional housing subsidies.
Basic economic theory has gone out the window - the horse has bolted on our housing market - and we've got a tidal wave of retirees who don't own-their-own homes going into retirement, so can't afford markets rents on the current superannuation. Read the Salvation Army report and let me know whether we can 'wait' for supply/demand to balance out.
Time for crisis management is well past - a circuit breaker is needed.
That's fine for things you can make day to day choices over, such as whether or not to buy lunch from a cafe or make you own, what's on special at a supermarket. With housing you cannot be moving around to take advantage of the 'special' down the street, and because of that. housing should be considered outside of the 'market' ideas.
Precisely. A completely unique business model which can survive with just 1 customer for 12 months, so should be treated accordingly.
Even better, you don't have electricity bills to keep the lights on. Or staff with PAYE. Or advertising. You don't need sufficient profit to replenish inventory, replace stolen inventory. Will the bank let someone leverage the equity in a dairy to buy additional dairies? Equity gained through market appreciation.
GST refund of sale price of new builds if rented for a minimum of 2 years. Mortgage interest deductible for that time.
At the moment it simple doesn't pay to build new houses. That's why construction companies are going bust and will do so unless they can reduce costs somehow.
But if govt makes it profitable for private landlords, then there will be more supply.
Surely this would require a charity. Why would a private company build a brand new house and rent at bottom end prices in a tight market with a high chance of it being trashed? Seems as unlikely as a rental car company renting out a brand new car for less than an old dunger to someone who can’t drive.
People should be able to chose between the two, and not be forced into one. It's not unreasonable for a median income couple to save hard for 2 years to purchase a modest starter home.. You know, purchase at 3 - 5 x their combined income with a minimum 10% deposit.
Someone earning minimum wage? Maybe not so, but they should still have the choice of upskilling into a median paying role to enable this to happen. But people are forced into renting, which then eats their ability to save, and negates their ability to reasonably chose the option of home ownership.
You do understand that the owners would have had to pay for the house in the first place in order to rent it to the tenant. They have tied up their capital and probably have to pay interest to the bank. Then there's rates, insurance, maintenance and repairs.
For a long time it hasn't been possible to pay off an investment property with rent alone and, with the removal of interest deductibility and the absence of capital gains, providing rental properties to the market is almost an altruistic activity.
That’s quite an old fashioned view. I think the younger generation realise that they’d have to sacrifice too much to own their own place, so yes, it’s a conscious decision, but based on self preservation. I do see your point that it’s better to have the deed to your home in retirement… but young people feel there is real risk to buying at the moment and that renting is the sensible option.
Yes it is old fashion and in many cases not good financially as many are going to find out, but the more fashionable version in overseas jurisdictions that have proper BTR's and have the balance is, if done right, it does not matter if you own or rent on retirement, except that the choice is yours to choose.
In fact, studies have pointed out, that there are certain times it can be more advantageous based on your age (ie not because you were born in the right or wrong decade) to do one or the other. For example, if you get locked into home ownership too early it can limit career opportunities for many, and this shows up in the variation of GDP in countries and has been given as one of the reasons NZ has a lower GDP compared to other countries, even with us working longer hours.
NZers have about 65% of their household wealth tied up in property (mainly their own home), China is approx. 67%, and the USA, that bastion of housing, only 35% (the rest being on other investments, like shares etc.)
We have too many eggs in one basket, with present BTRs just another egg to add to the scrambled egg housing omelet.
Build to Rent is most definitely NOT affordable housing! (Unless it is subsidised to be so) It’s market rental.
This isn’t to say it is without value. It certainly is part of the overall housing approach, and certainly can provide benefits such as greater tenure security.
And obviously if it becomes a compelling investment option lots of it will get built and that’s a good thing for supply and overall market rental affordability.
I watch a lot of things getting built, and it's hard to ignore the massive fall in productivity as compliance costs rise. I'm talking 3-4x multiples.
People should be able to build what they want, so long as they're responsible for it. But then insurance companies want more certainty.....
There are no covenants on the property – the buyer could bulldoze the garden and build anything they like on it, but it’s hoped that won’t happen.
BUYER BEWARE! Because that statement is so far from the truth.
stunning property with the 'most sensational knot garden in the world https://i.stuff.co.nz/life-style/homed/selling/130708703/tourism-downtu…
BTR is a great idea, until the builder decides that it would be a good idea to cash it all in and use the proceeds for...well...other things; but good things, of course. And if it's by selling to the current occupants, what could be fairer than that!
In 1979, there were 6.5m council homes; now there are 2.2m, while 4.4m households rent privately, twice as many as 15 years ago. But selling off social housing has left millions of Britons in grotty privately rented accommodation....the right to buy is implicated at every stage of a housing crisis that has been 40 years in the making.
https://www.theguardian.com/society/2022/jun/29/how-right-to-buy-ruined…
Maybe the Government could introduce Kainga Ora housing bonds, and allow the commercial banks to issue mortgages to "mom and pop" investors to purchase. Enable interest deductibility in this instance.
If done right, "mom and pop" investors can uphold their heroic duty to society by providing housing, hopefully profit in doing so, and not go crying to the media when a tenant hangs a picture using a drawing pin.
Except those born between 87-91 are now hitting 31-35 years of age, and are over 10% behind the 82-86 group at the same age. The next biggest gap between cohorts was 3.5%.
Also not sure what graph you're looking at but those born in 62-66 better hurry up and buy otherwise they'll be nearly 20% behind the 47-51 group when they retire.
I don't see much convergence. Each new generation's curve sits pretty cleanly beneath the generation before. A steady downwards trend in home ownership.
Take a look at the datapoints for different generations at 25-29 years old for example. Home ownership fallen from ~54% to ~36% for this cohort, over a few decades.
As you would expect it to as each generation has a different priority at that age than buying a house. My parents were married with two kids by the time they were 25 - that would be exceedingly rare these days. Most people also didnt spend 3-5 years at University, and have large student debts instead of a house deposit. As the younger generations put off relationships and children, in favour of studying, careers, and travelling, they have a much lower demand for houses. That's just basic demographics and has nothing to do with housing affordability.
Just basic demographics. Hilarious.
- Your parents generation likely didn't need a University Degree for a median income job.
- Your parents could get married and have 2 kids by 25, because they probably bought a house at 22 after they accumulated less than 6 months of pay in savings for a house deposit.
But no, young people these days are just spendthrift studiers and travelers which is why they're putting off relationships and children. Nothing to do with access to stable housing.
First, the whole purpose of BTRs first and foremost is that they should be cheaper to build( scale and cheaper institutional money) and cheaper to operate, both because of scale and things like no churn cost of approx. 5% every 7 years as happens with standard selling turnover. So unless they are cheaper, then they fail that test.
Secondly, the article mentions that the definition of what a BTR is MIGHT have been highjacked, 'for investors to make financial gains while masquerading as a solution.'
Then it presents those very 'HAVE been highjacked 'masquerading solutions as, 'the solution.'
For clarity, let me make it very clear that the Anglosphere version of BTR's is not remotely like the intended or the actual purpose of how BTR's operate in countries like Austria where they originated.
The real purpose of how a BTR is meant to work is this:
An owner-occupier pays a mortgage and with some small capital gains (to keep pace with inflation, ie nil sum gain), by the time they get to retirement have a freehold house (which they can also draw equity in the form of a reserve equity mortgage), plus whatever else they have saved so that on retirement they can still have a comfortable retirement.
The BTR occupier, renting at about the same or slightly less cost than the homeownership, has invested what they would have spent on the deposit, and other savings into other investments that give them the same returns as the owner occupier gets for any capital gains on their house (eg REIT's, sharemarket), so by the time they get to retirement they have the same amount of funds to keep renting a house or have the funds to buy freehold.
The point is that a true BTR system puts both parties in the same financial position at retirement.
So of course this is not possible in NZ where housing capital gains are almost the only investment vehicle available, and are not linked to the general rate of inflation, but are driven by policies that allow monopolistic rentier super profits to be made, and which the rents are set against, and as high as they can to get a 'yield' that at least covers the mortgage, making the extraordinary capital gains free money.
So for those that are promoting BTR's, show us your figures that show what will happen to your long-term tenants when they retire.
If they can't afford to keep renting on retirement, by using THEIR other invested funds, and not ratepayer subsidies, then it is a sham and another name 'for investors to make financial gains while masquerading as a solution,' and in the long term only 'kicking the can down the road,' and a growing problem for more people on retirement.
Well said. Big issue as you say is many BTR investors will expect to be able to take out a residential mortgage, so the two home ownership models share the exact same costs. The BTR investor will want a return and so will the bank, so the BTR occupier ends up worse off.
This is why it's better left to the corporates, because they're more likely to have capital to invest. "Mom and Pop" investors put in nothing aside from a signature on a 100% loan document, so they have added overheads of mortgage payments and interest.
Yes, self-discipline can be an issue, but it is a learnt cultural issue, just like NZers are culturally trained by bad policy to put all their money into housing.
But ir can be just as simple as renters putting more of their income automatically into Kiwisaver-type investments.
https://www.youtube.com/watch?v=41VJudBdYXY There is plenty of info. on line. Some systems are better than others.
Why do we need so many rentals and landlords in NZ? With increasing interest rates, houses are dropping in price. This means the house value to income ration decreases. The people who have been let down are first home buyers who purchased in the last year, many who may end up in negative equity due to all this money printing and record low rates.
This is a bit of a grenade but I think this is a sign of the times and a portent of things to come
Not what you would call affordable,but would suit many...
https://www.news.com.au/finance/money/costs/why-this-melbourne-apartmen…
Rooftop terraces, exclusive cinemas, pools and even a dog park. There’s a reason this building in the heart of Melbourne is so popular but it comes with a catch.
How about instead of this build to rent scheme we just offered very low fixed interest 30 year loans to people on lower incomes, with the proviso that the minimum repayment rate being set at 25% of income?
Sort of like what State Advances provided. Before the neoliberal scam started.
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