Labor’s 2023-24 Budget offers some reprieve from the housing initiatives of past budgets. For around a decade, federal government approaches to housing have been focused on home ownership, often through demand-side policies, and always in the face of a growing cohort of private renters.
This budget reiterated commitments to provide more supply from 2024 and the continuation of ‘Home Guarantee Schemes’, but new initiatives were also announced around an adjustment to Commonwealth Rent Assistance (CRA), Build-to-Rent (BTR) development incentives, a further increase to funding of community housing, and increased funding to the states to tackle homelessness.
While this budget gave renters some level of recognition, low income households in the private rental market will be disappointed. Even for those who qualify for CRA, the increase in payments is modest relative to the broader increase in rents across the market.
Further review of CRA would be worthwhile to understand how it could be better expanded and targeted. For some in the private rental market, the expansion of home guarantee schemes may help them get into home ownership faster, but low-deposit home loans should be carefully considered in the context of a higher interest rate environment.
The Government faces some constraints in providing stimulus to build new housing. With a high inflationary environment, constrained construction sector and high net government debt levels, it is understandable that the private sector is being incentivised to provide more housing development. However, this provides little clarity around how much the boost to build-to-rent will deliver in the way of affordable housing. Direct investment into social housing or the passing of the help-to-buy scheme through parliament would be a step in the right direction for having a more material impact.
A closer look at the CRA program, the proposed BTR changes and the tweaks to Home Guarantees suggest we have much further to go in creating a fair, secure and affordable housing market for Australians, explored below.
An increase to Commonwealth Rent Assistance (CRA)
CRA is the government’s largest single housing assistance program, with expenditure of around $5.3 billion in 2020-21. It is paid to around 1.35 million households in the private rental market, or in community housing, who qualify for other support payments like JobSeeker, Austudy or Youth Allowance.
The government announced a 15% increase to the maximum rate of CRA from September. Because CRA is assessed on minimum rent thresholds, relatively high private rental market costs mean that the vast majority of recipients (around 80%) are getting the maximum CRA payment. At a cost of $2.7 billion, the increase is expected to equate to a $31 rise in CRA per fortnight.
While this at least recognises challenges faced by renters, $31 per fortnight is a modest increase relative to the rise in private rent values. CoreLogic imputed rent values suggest the national median rent has increased the equivalent of $113 per fortnight in the year to April alone.
Under the Budget proposals, some households receiving CRA will also see a boost from the $40 increase for JobSeeker payments from September, continued indexation of support payments, and relief on energy bills. However, with housing supply initiatives not scheduled until 2024, and no ceiling on rent increases for private landlords, there is a greater risk of these income supplements simply putting further upward pressure on rent values.
How does the CRA increase stack up to recommendations from the Productivity Commission?
Late last year, the Productivity Commission released a comprehensive report on the National Housing and Homelessness Agreement. Among many recommendations in the report, it called for a review of CRA to asses how it could be made fairer and more efficient.
The report notes that an increase to the maximum CRA payment is a “simple, fast and effective way to alleviate rent burdens”, but the downside is that better-off households will also benefit from the increase. In the 2019-20 financial year, around 28% of CRA recipients would have avoided housing stress without receiving rental support. Around 27% of recipients in the same year were in the top 60% of household incomes. This is because recipients were able to still access the full amount of CRA even if they no longer qualified for their other support payments in full.
Another option outlined was to index CRA to changes in rent increases, rather than just inflation. This would be more complex and costlier, but it would create much greater security and stress relief for low income renters.
Ideally, CRA increases would be complemented by better targeting of the scheme to households at higher risk of rental stress, and CRA eligibility would be expanded to those in the private rental market who do not receive other government support payments.
Back at it with Build-to-Rent (BTR)
A lesser-known part of Labor’s 2019 election housing policy platform was tax reform on BTR developments. In part, this was shrouded by the debate around proposed changes to negative gearing and capital gains tax concessions. But it may also fly under the radar in public discussion because it is hard to understand.
Labor’s budget outlined “a reduction in the withholding tax rate for eligible fund payments from managed investment trusts attributed to newly constructed build-to-rent developments from 30 to 15%”.
Unpacking the BTR policy
BTR refers to a residential development where all units are retained and rented by one owner, as opposed to developers building housing to sell off to individuals. BTR is common overseas, but in Australia it doesn’t stack up as well under our tax settings and relatively low yield environment. BTR developments are designed to provide long-term rental return for investors, and are more popular with corporate or institutional owners, such as superannuation funds.
A managed investment trust (MIT) is a publicly-held, commercially operated collective that invests in passive income-producing assets (such as real estate). According to the ATO, the structure allows eligible foreign investors to access a reduced rate of tax on fund payments from the trust.
It is common for some assets, such as commercial real estate, to have a withholding tax rate of 15% through a MIT as the Labour Government is proposing for BTR. However, the Morrison Government actually increased the withholding rate to 30% for residential housing income (with the exception of investments in social and affordable housing investment). This was in a bid to have ‘foreign investors pay their fair share’ of tax on residential property. Industry players in the building and development space believe this has hindered the development of BTR in Australia.
Essentially, Labor is reverting the tax rate back down to 15% to make BTR investment more attractive. In addition, they will increase after-tax returns for investors by increasing the depreciation rate from 2.5% to 4%. Joint research from EY and the Property Council argue this could boost housing supply by 150,000 apartments over 10 years.
It’s important to note, BTR is not necessarily affordable housing. It often offers high spec amenities, is in desirable inner city locations, and aimed at providing a steady stream of rental income for investors. Past research on BTR overseas has suggested it can actually be more expensive than the broader private rental market. However, for some households it will offer a more secure alternative to the current system of renting in Australia. Any additional rental supply, even if it is taken up by relatively high income households, will also help to free up some room in the broader rental market.
Expanding eligibility of recipients for low-deposit home loan schemes
The Federal Government currently has three low-deposit home loan schemes running:
- The First Home Guarantee, which enables eligible first home buyers to access a home loan using a 5% deposit without paying lenders mortgage insurance (LMI). It has 35,000 places per year.
- The Regional Home Guarantee, which enables eligible first home buyers in regional Australia to access a home loan using a 5% deposit without paying LMI. It has 10,000 places per year.
- The Family Home Guarantee, which enables eligible single parents to access a home loan a 2% deposit without paying LMI. It has 5,000 places per year.
Each scheme has various eligibility criteria around the home being purchased, income and participating lenders, with more information available from the Government’s National Housing Finance and Investment Corporation (NHFIC).
This week’s Budget outlined an expansion to the criteria of those who could qualify for home guarantee schemes:
- The offerings may now apply to any two applicants beyond spouses and de facto couples (for example, parents and children, siblings or even friends).
- Non-first home buyers who have not owned a home for at least 10 years may now be eligible for the First Home Guarantee and the Regional Home Guarantee (where they already qualified for the Family Home Guarantee).
- Single legal guardians of dependents may now qualify for the Family Home Guarantee.
- Permanent residents may now also qualify for the Home Guarantee Schemes.
The expansion of criteria makes these policies fairer, but it may not make them more effective. The relatively high-income thresholds around the First Home Guarantee in particular may help people into housing faster, who would have achieved home ownership anyway, limiting more equitable home ownership across income distributions.
If interest rates decline, these schemes will make more sense for hopeful home owners comparing the cost of taking on more mortgage debt with the ongoing costs of renting, and they will likely see more take up in the years ahead.
Meet Eliza Owen
Head of Residential Research Australia
Eliza Owen was appointed the Head of Research at CoreLogic Australia in 2020.
Full profile