STEPHEN JOHNSON: Why rents could soar by 30 per cent even if landlords aren’t greedy

Australia’s landlords will simply have to put up their rents if they can’t negatively gear their losses from July next year, leaving tenants worse off as more of them compete for fewer available places to live.

National Australia Bank and real estate group Ray White have this week both modelled the prospect of rents rising by 30 per cent to compensate for the loss of tax benefits.

Without being able to claim rental losses against their taxable income, rental yields — or a landlord’s annual rental income as a proportion of the property price — would have to rise.

Property investors who bought their home to rent out before the May 12 Budget will continue to get access to negative gearing under Labor’s grandfathering provisions.

But those who exchanged an existing house or unit after that date won’t be able to offset rental losses on their annual tax return when negative gearing is restricted to brand new builds from July next year.

With fewer investors entering the property market as Australia’s population continued to increase, Ray White chief economist Nerida Conisbee said tenants would simply end up paying higher rent, based on supply and demand rather than the greediness of landlords.

“It’s not so much that landlords will increase rent, the issue is that we are going to see fewer rental properties coming to market,” she told The Nightly.

“When we see fewer rental properties coming to market, it means the availability of rental properties will fall and in markets where we’re still seeing strong population growth, that becomes then very competitive for renters to be able to get properties.”

Capital city rental yields stood at 3.6 per cent in July, Cotality data showed, but Ray White calculated that these yields would have to increase to 5.2 per cent for new landlords to have enough cashflow to offset the absence of negative gearing.

Under that scenario, rents would need to rise by 30 per cent, even if home prices stayed the same, covering investors who bought a property with a 20 per cent mortgage deposit.

“We’re going to see fewer rental properties coming to market because the viability of owning a rental property has been reduced — at some point though, because we’re going to see fewer rental properties, it will push up rents and at some point it will become more viable to own a rental property,” Ms Conisbee said.

Sydney, Australia’s most expensive property market, has an even lower gross rental yield of 3.3 per cent, meaning an even bigger rise in rental yields for a prospective landlord to be able to service a bigger mortgage.

“In a city like Sydney, rental yields are very low and as a result, over the last few years, we have seen relatively low levels of property investment relative to other cities,” Ms Conisbee said.

Strong price gains since COVID mean lower rental yields too in Queensland, South Australia and Western Australia with rental yields of 3.4 per cent in Brisbane, 3.5 per cent in Adelaide and 3.8 per cent in Perth.

The more affordable markets have higher rental yields with Melbourne at 4 per cent and Hobart on 4.3 per cent.

Investors have already turned away from property since Treasurer Jim Chalmers delivered his fifth Budget.

During the June quarter — including the seven weeks after the May Budget — the number of new investor loans fell 8.6 per cent as the value of these loans fell 10.2 per cent, Australian Bureau of Statistics data showed.

Capital city house prices have soared by 7.1 per cent during the past year to $926 a week, SQM Research data showed, with the increase significantly higher than the 3.8 per cent inflation rate, illustrating how bad the existing housing shortage already is.

Labor is replacing the 50 per cent capital gains tax discount, from July 1, 2027, with indexation for inflation and a minimum 30 per cent tax.

That is less likely to discourage property investment given inflation is high and capital growth is likely to be weak in coming years.

The big surge in house prices since the pandemic-era of record-low interest rates means very dramatic, double-digit falls would be needed for average-income first homebuyers to get into the market, which would be unlikely without a deep recession.

In the meantime, young people wanting to get into the property market as owner-occupiers will end up paying higher rents, making it harder for them to save up for a mortgage deposit.