How investors can ease the rental crisis

Scott Kuru November 25, 2024 6 min read

Image by Richard Walker

KEY POINTS

Property investors could help address Australia's rental housing crisis with modest incentives, says a study
Suggested incentives include "headleasing," where investors receive guaranteed market rents while their properties are sublet at reduced rates by community housing providers
Most investors in affordable housing schemes report positive experiences, but awareness of these programs remains low

New research for Australia’s leading independent housing think-tank has highlighted the role so-called ‘Mum and Dad’ landlords can play in helping to deliver affordable housing.

The study, published by the not-for-profit Australian Housing and Urban Research Institute (AHURI), highlights how with the right incentives, small-scale property investors are willing to engage in community or social housing schemes.

The research by academics from the University of South Australia and Melbourne’s RMIT University is important, as it highlights the critical role the private market plays in providing long-term rental accommodation in Australia, given the failures of governments over decades to provide adequate public and social housing for low-income Australians.

The main findings are that with the right financial incentives and more education, it would be relatively straightforward to get many of these “Mum and Dad” investors to engage in affordable housing schemes.

The background

With nearly one-third of Australians renting their homes, the researchers behind the AHURI study say affordable rental options are becoming increasingly important to low-income and middle-income earners, as they are being priced out of the market.

“Essential workers, older Australians and women are particularly facing housing stress, but even ‘rich’ households—with incomes over $140,000—are turning more and more to rental properties as the cost of buying a residential dwelling has become prohibitive,” they say.

Their paper, “Incentivising small-scale investors to supply affordable private rental housing”, estimates a shortfall of 348,000 “affordable and available private rentals” in 2021 for Australian households with the lowest 20% of incomes, “and this shortfall is predicted to increase.”

With the Build-to-Rent sector in its infancy, few institutional investors in rental housing and a relatively small public housing stock, the researchers note that “Mum and Dad” private investors comprise 90% of all property investors in Australia, owning 23% of all dwelling stock.

However, they note that “government programs have had limited success in drawing these investors into the affordable housing market.”

Therefore, they say, “It is important to find new, effective ways to incentivise small-scale investors to enter the affordable housing market.”

What property investors want

The researchers say there are two main business models for small-scale landlords: the first being “a positively geared long-term hold investment”, while the second is “the short-term hold for capital gain investment model”, colloquially referred to as “property flipping”.

“Generally, short-term landlords focus on capital gains and negative gearing to create their housing wealth,” says lead researcher, Associate Professor Akshay Vij from the University of South Australia.

“They prefer to buy newer, higher-value properties and, as a consequence, are not a significant source of affordable housing.”

On the other hand, long-term hold investment landlords are happy to consider affordable housing schemes “as long as such schemes allow them to realise their required rate of return.”

“This is the largest group of investors,” Associate Professor Vij says, “they are moderate-income households that invest on the basis of being positively geared, which means they are cash flow-sensitive—particularly in the early years of their investment.

“In general, they purchase cheaper housing in lower value locations, providing a source of affordable rental housing, and are sensitive to the affordability issues faced by tenants.

“They don’t, however, drive the creation of new stock.”

So how can you get more of this second, larger group of investors to take part in affordable housing schemes?

Cash flow

“Small-scale investors need positive cash flow in affordable housing schemes,” say the researchers.

They point out that ‘long-term hold’ landlords are attracted to projects that maximise the potential for a positive cashflow — schemes that focus on capital gains, such as negative gearing and tax concessions, have less appeal.

A good example of a scheme that could appeal to these investors is one with guaranteed rental income.

Also, “it is important to index rent increases to market rates so that investors who lock into long-term schemes are not discouraged,” the researchers say.

Headleasing

The paper’s authors highlight their findings that all the landlords surveyed in their research who had participated in a headleasing scheme “were fully supportive of such programs.”

In a headlease program, social and community housing providers lease private rental accommodation at market rates from property investors.

They then sublet these properties to approved households at a reduced, affordable rent, with the difference usually funded by a government subsidy.

“The advantages for landlords included guaranteed rental payments providing cash flow security; no loss of rent due to vacancy and no need to advertise for new tenants; and reduced administration demands.”

In other words, many landlords are attracted to this “set and forget” method of property investment, where they don’t have to worry about finding new tenants when an existing renter decides to move, and they don’t need to haggle on rent prices or constantly deal with managing agents and requests for maintenance.

“Make-good” provisions

The AHURI research also found that small-scale property investors were more likely to be interested in taking part in affordable rental schemes if there were “make-good” provisions.

These are guarantees that at the end of a set term, the property is returned to the investor in its original condition, with the cost borne by the social housing provider administering the scheme.

Awareness

Researchers from the University of South Australia and RMIT University say 81% of property investors who had previously engaged with affordable housing schemes found them satisfactory.

They also found that between 40% and 60% of landlords they surveyed said they would be willing to participate in a scheme.

However, there was generally poor awareness of how affordable rental schemes work.

“Many landlords were not financially sophisticated and tended to invest from a place of ‘sentimentality and informality’ rather than an objective assessment of investment risk and return,” says lead researcher Associate Professor Akshay Vij.

“A coordinated national education program to increase awareness of affordable housing incentive schemes could improve participation.

“It could also improve financial literacy and filter out vulnerable investors before they enter the affordable housing market, thereby minimising disruption for tenants caused by financial over-commitment.”

The take-out

Private, small-scale “Mum and Dad” property investors are the key to Australia’s rental market - whether it be in providing high-end executive-style rentals or affordable housing.

While the authors of the paper say it would be preferable if community housing providers could provide affordable housing rather than private investors, they acknowledge this sector is “unable to provide the quantity and diversity of housing stock required to meet demand.”

The authors also acknowledge that it can be expensive to provide the incentives that would be required to entice more private investors into the affordable housing space.

For example, they say a headleasing program that includes make-good provisions “can be expensive, costing on average $40,000 to restore a property to original condition.”

There’s also the cost of the subsidy gap between the guaranteed rent paid to the owner and the discounted rent offered to the tenant.

However, I’d argue these costs pale into insignificance compared to the huge maintenance bills governments pay to maintain Australia’s existing ageing public housing stock and the huge costs of building new public, social and community housing.

Private “Mum and Dad” investors, who often own just one investment property, have provided the overwhelming bulk of rental accommodation in this country for decades.

Given the right incentives, they are prepared to continue to do the heavy lifting to solve the housing crisis.