Mum and Dad investors are driving Australia’s rental market

Federal, state, and local governments are flat out trying to fund the nation’s essential infrastructure, let alone rental accommodation. The percentage of Australian residential dwellings that are funded by governments has shrunk to a miserly 2.9 per cent per year. ‘Mum and Dad’ property investors need to continue to be encouraged to add to the rental pool.

According to official ATO records, 30 per cent of all Australian residential dwellings receive rental income. The other 70 per cent of dwellings are occupied by the owner (whether mortgaged or debt-free).

For as far back as history books can take us, Australian governments have not had the capacity to fund properties that make up the rental pool for what has become the fastest-growing population in the developed world. Governments can’t manage to fund essential infrastructure such as roads, hospitals, ports and public transport.

Approximately 80 years ago, the federal government came up with an initiative to encourage investment from private citizens who had some capacity to fund property/s, to keep up with the growing demand on Australia’s rental pool.

The incentive effectively treats investment properties as a ‘business’, in that they are an asset that receives income. Just like in a more conventional business, the owner is entitled to claim all expenses associated with running that business. 

Property investing is essentially a business that provides accommodation. Over the years, the term ‘negative gearing’ has been adopted. The tax policy applicable to accommodation businesses (property investment) is consistent with all other businesses and investment in shares.

With more financial pressure placed on government budgets each year, and a reluctance to increase taxes to raise more revenue, governments have become less and less able to fund rental properties.

Official ABS data dates back to the early 1980s. Between 1984 and 2005, the public sector funded only 5.2 per cent of all dwellings supplied. That means the private sector (including many Mum and Dad investors) funded the remaining 24.8 per cent of the total 30 per cent of properties in Australia’s rental pool.

Fast-forward to the most recent decade (2006 to 2015), and the public sector’s contribution to Australia’s rental pool has shrunk even further, to a miserable 2.9 per cent.

Moreover, 80 years of Australian history highlights the importance of negative gearing to Australia’s economy. Not only does the tax policy play an important role in easing pressure on rental accommodation, it also encourages mums and dads to invest. Households that don’t invest sufficiently during the 45 years they are active in the workforce (ages 20 to 65) place added pressure on government budgets by becoming reliant on taxpayer-funded pensions for their remaining 25 years (ages 65 to 90).