Easing the housing shortage: will the carrot or the stick work?

An interesting experiment is playing out involving property owners and investors on both sides of the country at the moment.

It all revolves around getting more homes onto the market in a bid to ease some of the current chronic shortage of rental properties but using very different approaches.

In one corner is the cashed-up state government of Western Australia, which has unveiled a range of generous incentives to get property owners to put unoccupied homes and properties currently rented out as Airbnbs onto the long-term rental market.

Debt-laden Victoria, on the other hand, is pursuing a more punitive approach, by extending a vacant land tax.

The West Australian model

It’s no secret that Australia’s housing crisis is probably most acute in Western Australia. Perth is experiencing a population boom driven by significant overseas and interstate migration. 

A record 95,000 people moved to Western Australia last year, and in March 2024, the WA capital had a rental vacancy rate of just 0.5%.

In fact, for the last 5 years, the rental vacancy in Perth has been below 3%.

Property industry watchers generally regard 3% as a “healthy” vacancy rate, in which tenants have a decent choice of housing and landlords are still guaranteed a good return on their investment.

That low vacancy rate has also seen rents soar 13.6% over the last year in Perth, according to CoreLogic, the highest jump of any capital city, putting even more pressure on tenants.

As part of WA’s 2024-25 State Budget, the government of Labor Premier Roger Cook has promised more than $840 million in spending on social and affordable housing and homelessness initiatives.

But it’s a budget measure to free up existing vacant homes for rental that has grabbed the most attention.

The Vacant Property Rental Incentive Scheme will offer a payment of $5,000 to property owners who put vacant homes onto the long-term rental market.

Up to 1,000 places will be offered under the $5 million scheme.

To qualify, people must own a property that has been vacant for at least six months.

It must be a single, self-contained property with its own bathroom, kitchen and toilet.

Spare rooms or granny flats don’t qualify.

Owners must be able to offer tenants a minimum 12-month lease, and the property can’t already have been the recipient of a separate state government incentive called Short Term Rental Accommodation (STRA), designed to free up short-term Airbnb properties for longer term rental.

WA State Treasurer Rita Saffioti says she believes the Vacant Property Rental Incentive Scheme “has the potential to bring up to 1,000 properties back onto the rental market that would otherwise be sitting vacant and unused and, most importantly, could support up to 1,000 Western Australian households to find a long-term rental.”

The scheme has been inspired by what the state government says is the successful implementation of the STRA Incentive Scheme.

That’s a $10,000 incentive payment to get owners to switch properties from short-stay accommodation to the long-term rental market.

So far, 150 owners have been prompted to take up the STRA payment.

“We’re interested in incentivising West Australians,” says WA’s Commerce Minister Sue Ellery, “not using the stick that perhaps some other jurisdictions have used.”

That’s a none-too-subtle dig at Victoria.

“That’s not the way that we try to do business in Western Australia…we prefer to use a carrot,” she says.

The Victorian model

Melbourne is also experiencing a housing shortage, particularly when it comes to rental properties.

In March, the city’s vacancy rate was only 1.1%, and CoreLogic says rents in the Victorian capital have jumped 9.6% in a year.

The Victorian Labor government of Premier Jacinta Allan has attempted to ease some of this pressure with changes to the state’s land tax regime that passed state parliament late last year, but ironically, it may have had the opposite effect.

A tax on vacant homes and blocks of land in Melbourne’s inner and middle ring suburbs has been expanded across the city and now also applies to the whole state of Victoria.

From the 1st of January this year, a tax of 1% of the total value of unoccupied land, including any buildings on the site, applies.

It then rises to 2% in the second consecutive year of no occupation, and 3% in the third.

The state’s Treasurer, Tim Pallas, originally indicated the changes would see another 600-700 homes taxed, raising about $16 million dollars, although some tax experts have predicted many more homes and land will end up being caught in the tax net.

Victorian premier, Jacinta Allan, has described the reforms as “addressing behaviour change”, rather than a revenue grab by the cash-strapped state.

“Land banking doesn’t get more homes built...properties sitting vacant doesn’t provide people with the dignity of a roof over their head,” she says.

The Real Estate Institute of Victoria has reacted to the changes with dismay.

“We know that incentivising people to use the land, rewarding them and encouraging them, will get the land use happening a lot quicker,” the Institute’s chief executive Quentin Kilian says.

There’s also evidence that the reforms, combined with other new Victorian state government tax slugs that affect property investors and people with holiday homes, may have actually led to the opposite of their intended effect.

Data from property analytics company Suburbtrends shows that many property investors are selling up in Victoria. The number of ex-rental property listings was up by 52% in January this year alone.

These extra listings have helped suppress home price value growth in Melbourne this year, and many of these ex-rental properties are now being bought by first-home buyers.

While that’s obviously a great development for those looking to get their foot on the property ladder, it means there are fewer rental properties available in Victoria, a situation that’s driving rents up and keeping rental vacancy rates extremely low.

Maybe a big stick isn’t as effective as a carrot after all…