Private residential landlords are unfairly demonised

No investor class is more regularly picked on by politicians of the left and by some members of the public than residential landlords. Landlords have become scapegoats for high rents and housing shortages. They are regularly condemned for being "greedy", dodging "their fair share" of tax, wrongly evicting or "exploiting" tenants, not allowing pets, and for renting premises that are allegedly "not up to standard".

While landlords in general are often begrudged, anybody owning more than one or two rentals is subject to even more venomous envy. (One gets the impression that someone who has a lot of rental properties has actually done something wrong!) By contrast, you don't hear the same type or intensity of criticism (often poorly informed) about, for example, those investing in shares, investing in superannuation, owning artworks or collectables, or holding bank deposits.

People talk about the "right" to housing but don't consider who is obligated to provide it. Surely, if there is such a right, this is a community/government obligation, and not something to be borne solely by the minority who rent out residences.

Speaking broadly, there are two inescapable facts facing the rental housing market in Australia. The first is the persistent shortage of rentals in recent years, evidenced by sharply rising rents and low vacancy rates. The second is a failure of the part of the public and community sectors to fulfill their obligations, thus relying on private landlords to make up the big shortfall.

According to the 2021 Census, Australia's housing stock consists of 6.2 million owner occupied dwellings and 4.7 million rented dwellings. Only about 350,000 of the latter (7.5 per cent) are comprised of state housing units, so that, overall, it is overwhelmingly private landlords and not state housing bodies that are putting roofs over people's heads. This is despite the fact that there is supposed to be an internationally recognised "right to adequate housing ". This right to housing is set out in Article 11(1) of the International Covenant on Economic, Social and Cultural Rights (ICESCR).

The estimated total value of Australian residential real estate was $ 11.3 trillion at the end of December 2024, with the privately rented component perhaps $3 trillion. Given current public sector indebtedness, and constraints on federal and state budgets, there is clearly no capacity on the part of government to replace private rentals.

In the face of shortages of rentals, it would seem sensible to incentivise landlords to increase supply. Instead, governments are doing the opposite and are also responsible for much of the increased cost of a new home. Up to half of the cost of a new home now goes in taxes and government charges , and delays in obtaining planning approval have resulted in it often taking longer to gain planning approval than to build the actual house. Publicly funded infrastructure spending sprees have also diverted tradies away from the housing sector, while subsidising first homebuyers merely serves to drive up home prices.

If you take a typical residential rental in a capital city, the rule of thumb is that, on average, the market rent in dollars per week is very roughly the property value expressed in hundreds of thousands of dollars. In other words, a $900,000 property commonly rents for about $900 per week, though there is some variation. This equates with an average gross return of approaching five per cent per annum, which reduces to maybe 2 per cent after deducting running costs, not counting interest.

Put simply, an operating profit of only 2 per cent before tax for a residential rental compares very poorly with an average 3.5 per cent (often fully franked) dividend for Australian shares, and 2.5 to 4 per cent for bank term deposits. For this reason, institutional and corporate investors generally steer clear of residential property, preferring higher returning commercial or industrial investments.

Also, contrary to popular myth, there is little scope for landlords or their agents to hike rents above market levels. Excessive rents are a mistake because an overpriced rental simply risks remaining vacant or attracting only bad tenants.

But what about capital gain, you might say? While there were strong nominal capital gains in some past years (particularly when COVID-related low interest rates prevailed, and in earlier years when inflation was running at a high rate), assets like shares have also experienced strong price gains. Given the current general unaffordability of housing and falling inflation, the scope for further hikes in housing prices is limited unless there are big falls in interest rates, big rises in wages, or rapid inflation returns, all of which seem unlikely.

The transaction costs for dwelling purchases are particularly high but are very low for shares and most other assets. When buying a dwelling, the stamp duty can sometimes reach 5 per cent of the purchase price. When selling, agents fees can range from about 1.5 to 4 per cent. Home buyers (including investors) generally also pay between $1,500 and $2,500 in conveyancing costs, while sellers might face typical costs of between $2,000 and $3,000.