The compulsory ‘retirement’ of Australian home ownership


By Dr Gavin R Putland

The latest polls say I was wrong: Malcolm Turnbull’s sellout to the property lobby will not cost him the election. Instead, the defeat of Shorten, Bowen and Leigh will consign any reform of negative gearing to the too-hard basket for another 20 or 30 years, during which the present rules will become so deeply embedded in the people’s financial and living arrangements that they can never be changed.

The key feature of those rules is that investors bidding for a home have a cash-flow advantage over prospective owner-occupants, because if the interest and other current expenses exceed the rental value, an investor can claim the difference against other taxable income, while an owner-occupant cannot. Admittedly, only investors pay tax on their (discounted!) capital gains when they re-sell; but that does not diminish their superior capacity to service loans in the mean time. Admittedly, only investors pay State land tax; but, due to thresholds and progressive rates, the effect is usually minor, especially for one’s first investment property.

Admittedly, the competitive advantage of investors depends on the assumption that interest and other current expenses exceed rental values. But that situation is more entrenched than you might think, for two reasons. First, the “current” expenses claimable by investors, but not by owner-occupants, include depreciation, which is not a cash flow. Thus a property can be cash-flow-positive and still reduce an investor’s taxable income, and therefore still give prospective investors an advantage over prospective owner-occupants. Second, even if prices crash, the effect on interest costs will be somewhat muted because a crash would destabilize the banks, raising their funding costs and making them more reluctant to lend, placing upward pressure on interest rates. The Reserve Bank does not have much room to move in the other direction, and in any case could find itself pushing on a string.

A Turnbull victory will entrench the bidding advantage of investors over owner-occupants, even for established homes. The age of home ownership as we know it is coming to an end. The age of investor hegemony is here. From now on, for a typical first home buyer, the only way to beat the investors will be to join them: make your first home an investment home, and forget about living in it, at least until the interest and other expenses are less than the rent.


That raises two problems. First, the home that you can afford now might be too small or too poorly located by the time you’re ready to move into it. If, by then, your income has risen enough to let you trade up, you will incur capital-gains tax on the sale and stamp duty on the next purchase. Second, if you subsequently downsize for your retirement, you’ll incur another round of stamp duty.

Both problems have the same obvious solution: Buy the home you want to retire in! In the mean time, let your retirement home to tenants, and rent the home you live in. If all goes to plan, you’ll pay conveyancing stamp duty only once in your life, service the mortgage with the help of negative gearing, and never realize a taxable capital gain. That is the rational response to the present tax regime. Even if not all goes to plan, buying one home and living in another will still be the only way to get a foothold in the property market, given the competition from others who are doing the same; and as long as you don’t own the home that you live in, you will still avoid the need to pay stamp duty every time you move.

Already about a third of first-time buyers are investors, and about a third of investors are first-time buyers. That means first-time buyers constitute a far higher percentage of investors than of owner-occupants. Buying one home while renting another has become socially acceptable. And when anything that lets you pay more for housing becomes socially acceptable, it is on its way to becoming compulsory: those who don’t do it may be outbid by those who do, forcing more to do it, so that those who don’t are more likely to be outbid, and so on. Such was the case with the second income. Such was the case with delaying parenthood. Such is now the case with negative gearing; and in order to claim negative gearing on your first home, you must refrain from living in it. We’re on a slippery slope, and at the bottom is a country in which the typical property owner is the landlord of one home and the tenant of another.


Now comes the scandalous part: I do not find this vista entirely depressing.

For one thing, the loss of stamp-duty revenue will force State governments to replace conveyancing stamp duty with something more efficient. Land tax is most often nominated as the alternative. Even before stamp duty is abolished, home owners who don’t live in the homes that they own can relocate without paying stamp duty. This will lead to a more mobile workforce.

For another, if you’re both a landlord and a tenant, you soon discover that the right not to be inconvenienced by your landlord is worth far more than the right to inconvenience your tenants. Hence, if a majority of voters are both landlords and tenants, we can expect tenancy laws to be changed accordingly. For example:

  • The right not to be evicted just because your landlord wants to sell is worth far more than the right to evict your tenants just because you want to sell, especially if, as is increasingly likely, the buyer immediately advertises the place for rent! All three parties would be saved a great deal of inconvenience if the original tenant stayed put.
  • The right not to be evicted just because your landlord wants to move in is worth far more than the right to evict your tenants just because you want to move in. A move is a move, and you can perfectly well move to the vacant rental in the next street or the next suburb.
  • Early notice of the need to move is worth far more than early notice of the need to find a new tenant. The work is in the moving. There may be compelling reasons why you don’t want to move in the next month or the next year. There may be equally compelling reasons for wanting to move soon — e.g., to take up a new job. But if you can’t find a new tenant in (say) six weeks, you are obviously asking for too much rent or indulging in illegal discrimination. Speaking of which…
  • The right not to be discriminated against by prospective landlords is worth far more than the opportunity to circumvent anti-discrimination laws to the detriment of prospective tenants.
  • The right, as a tenant, to put picture-hooks on the walls and leave them there is worth far more than the right, as a landlord, to compel your tenants to remove such hooks when they leave, so that the next tenants have to put them up again!
  • The right not to have to pay for professional cleaning of your landlord’s carpets and curtains, whether they need it or not, is worth far more than the right to compel your tenants to pay for professional cleaning of your carpets and curtains, whether they need it or not.
  • The right to keep pets, if you are so inclined, is worth far more than the right to stop your tenants from keeping pets.

Numerous aspects of current tenancy laws serve no purpose but to annoy tenants, so that they try harder to become owner-occupants and help to bid up prices. As owner-occupancy recedes further out of reach, and as more and more owners play both sides of the rental market, politicians will face a growing constituency for a clean-up of those laws.

Of course, reducing the notice required from tenants would further improve mobility of the workforce. I cannot help noticing that some politicians on the Coalition side would regard a more mobile workforce as a good thing. Neither can I help noticing that, while pro-tenant law reforms will be welcomed by the new class of landlord-renters, they will not be welcomed by those who waged the latest mendacious campaign against any changes to negative gearing. Sow the wind: reap the whirlwind.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.