Scott Morrison hoses build-to-rent

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By Leith van Onselen

Treasurer Scott Morrison has hosed a proposal to give tax breaks to managed investment trusts (MITs) that build homes for rent, claiming that it would be unfair to other investors. From The AFR:

Mr Morrison staunchly defended the government’s surprise decision last week to block managed investment trusts from buying residential property except for affordable housing.

“You cannot currently put residential properties in a MIT,” Mr Morrison told The Australian Financial Review.

“The sector is asking for a tax concession not available for Australian investors”…

[The property industry] say the move to limit the reach of managed investment trusts risks killing off build-to-rent development before it even starts, and will hamper the industry’s ability to deliver more low-cost rental accommodation…

Shadow treasury spokesman Chris Bowen on Friday slammed the move, saying the Treasurer’s announcement had ambushed the property and construction sector over a potential billion dollar addition to the real estate market.

The treasurer hit back over the weekend by lampooning Labor’s approach to housing affordability, which he said amounted to increasing taxes “on mum and dads investing in real estate while giving foreign investors a new 50 per cent tax cut.”

Major players are already gearing up to roll out build-to-rent projects, which aim to service long-term renters through an institutional landlord, a model that is well established in the US and Europe.

While the model promises to help address one of the greatest complaints of renters – the lack of stable long-term professional landlords and too many “cottage-industry” players – the economics of building-to-rent is not without challenge, given the collapse in rental yields in cities around the nation, but in Sydney in particular.

While so-called ‘build-to-rent’ sounds attractive, the practical application has been less than perfect in the United States, where hedge funds and private equity groups have been replacing individuals and small businesses in the rental market.

Here’s some of the results via the Huffington Post:

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There’s no escaping the stench of raw sewage in Mindy Culpepper’s Atlanta-area rental home. The odor greets her before she turns into her driveway each evening as she returns from work. It’s there when she prepares dinner, and only diminishes when she and her husband hunker down in their bedroom, where they now eat their meals.

For the $1,225 a month she pays for the three-bedroom house in the quiet suburb of Lilburn, Culpepper thinks it isn’t too much to expect that her landlord, Colony American Homes, make the necessary plumbing repairs to eliminate the smell. But her complaints have gone unanswered, she said. Short of buying a plane ticket to visit the company’s office in Scottsdale, Ariz., she is out of ideas.

“You can not get in touch with them, you can’t get them on the phone, you can’t get them to respond to an email,” said Culpepper, whose family has lived with the problem since the day they moved in five months ago. “My certified letters, they don’t get answered.”

Most rental houses in the U.S. are owned by individuals, or small, local businesses. Culpepper’s landlord is part of a new breed: a Wall Street-backed investment company with billions of dollars at its disposal. Over the past two years, Colony American and its two biggest competitors, Invitation Homes and American Homes 4 Rent, have spent more than $12 billion buying and renovating at least 75,000 homes in order to rent them out.

This new incursion by hedge funds and private equity groups into the American single-family home rental market is unprecedented, and is proving disastrous for many of the tens of thousands of families who are moving into these newly converted rental homes. In recent weeks, HuffPost spoke with more than a dozen current tenants, along with former employees who recently left the real estate companies. Though it’s not uncommon for tenants to complain about their landlords, many who had rented before described their current experience as the worst they’ve ever had.

“I’ve been renting homes for 15 years and I’ve never had a landlord be this ridiculous about getting stuff repaired,” said Henry Cecil, who moved into a four-bedroom house in Winter Haven, Fla., owned by Invitation Homes in March. Invitation Homes is an arm of Blackstone, the largest private equity firm in the world. The firm booked more than $4 billion in revenue in 2012.

There are some legitimate questions that need to be asked before launching into build-to-rent. First, will corporatising the rental market actually result in lower rents? Second, would a listed corporation charge any less than a regular landlord, especially so when its pricing power will obviously be higher? Third, would they be more or less accountable for maintenance and costs?

The jury is out on all these questions.

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Moreover, are we supposed to believe that adding such a cabal of capital gains-dependent corporations to the housing “market” will reduce its already monsterous lobbying power?

More likely, this is yet another policy favoured by the rent-seekers for the rent-seekers and aimed at sucking more lifeblood from the catastrophic market failure of Australian housing (read Australia’s youth).

If our policy makers genuinely want to ‘fix’ the housing market, they should instead tackle the following demand and supply-side distortions:

  • Normalise Australia’s immigration program by returning the permanent intake back to the level that existed before John Howard ramped-up it up in the early-2000s – i.e. below 100,000 from 200,000 currently [reduces demand];
  • Undertake tax reforms like unwinding negative gearing and the CGT discount [reduces speculative demand];
  • Tighten rules and enforcement on foreign ownership [reduces foreign demand];
  • Extend anti-money laundering rules to real estate gatekeepers [reduces foreign demand]; and
  • Provide the states with incentive payments to:
    • undertake land-use and planning reforms [boosts supply];
    • swap stamp duties for land taxes [boosts effective supply]; and
    • reform rental tenancy laws to give greater security of tenure [reduces demand for home ownership and reduces rental turnover].
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These are genuine policy solutions, not policy band aids designed as a new profit centre for the property industry.

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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.