Key takeaways
New housing is first and foremost a capital problem.
Governments don’t build homes; the private market does. And private investors fund almost all rental housing.
Capital follows the best or at least better returns.
No new housing supply happens unless development is profitable. Policy must match buyer ambition.
In short, economics wins.
For what seems like yonks, I’ve argued that Australia’s housing crisis isn’t really a housing problem.
It’s a capital problem.
Every government speech begins with the same objective: more housing, more affordable housing and more rental housing.
Yet almost every major policy announcement seems to make investing in residential property a little less attractive than it was before.
This week provided two more examples.
The first is the continuing debate around limiting self-managed super fund (SMSF) borrowing for residential property.
The second is the growing impact of the Federal Government’s proposed changes to negative gearing and capital gains tax, together with the Australian Taxation Office’s revised treatment of holiday homes.
Viewed individually, each policy may appear relatively modest.
Viewed collectively, they send a very clear message about the future direction of housing investment.
Why the SMSF and tax changes matter
The SMSF debate is particularly interesting because it is often portrayed as though large numbers of Australians are borrowing through superannuation to speculate on housing.
The reality is quite different.
Only around one in ten SMSFs currently use borrowings, with my estimate suggesting there are around 35,000 to 38,000 SMSFs nationally that have leveraged residential property investments. That is a relatively small proportion of Australia’s housing market.
However, these investors are disproportionately active in purchasing new apartments and off-the-plan developments, meaning their contribution to new housing supply is likely much greater than the headline numbers suggest.
The changes surrounding negative gearing and capital gains tax have received much of the attention, but another policy deserves greater scrutiny.
The ATO has now tightened its approach to holiday homes.
Where owners retain significant private use of a property, deductions for interest, rates, depreciation and other holding costs may no longer be available.
While this primarily affects lifestyle investors rather than mainstream landlords, it is another example of residential property becoming progressively less tax-effective as an investment.
Planning doesn't build homes. Capital does.
None of this is really about whether these individual policies are right or wrong.
The bigger issue is that Australia increasingly treats housing as though it is simply a planning exercise.
We approve more land, encourage more density, release more precincts and announce ambitious housing targets. Yet planning approvals don’t build homes.
Capital builds homes. Construction finance builds homes. Developer equity builds homes. Investor demand builds homes, well somewhat.
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And on this last point, there wasn’t enough investment monies going into new builds before these changes.
The legislated budget changes have just made matters worse.
Private investment delivers almost all new housing
That said, without those ingredients, planning approvals become little more than numbers on a government spreadsheet.
I’ve written many times that around 96% of Australia’s new housing is delivered by private capital.
Governments rarely build homes themselves.
Instead, they rely on developers, investors, banks and home buyers to fund and carry the risks associated with delivering new supply. That private capital only flows when the expected return justifies the investment.
This is where I think the current policy debate is becoming increasingly inconsistent.
On one hand, governments continue telling us that Australia desperately needs more housing supply.
On the other, they continue introducing measures that either reduce investment returns, increase holding costs or add uncertainty to future profitability.
Those two objectives don’t naturally sit together.
Capital will always follow better returns
Capital is remarkably mobile.
If housing becomes less attractive, investors don’t simply stop investing.
They redirect their money into private credit, listed equities, commercial property, infrastructure or they simply leave it in cash.
Housing, however, is not mobile.
If investment slows, fewer projects commence, fewer dwellings are built and supply falls further behind demand.
None of this means tax concessions should never change or that property investors deserve special treatment.
It simply means we need to recognise one fundamental economic reality.
If private capital delivers almost all of Australia’s housing, then public policy should encourage that capital to invest in housing rather than steadily encouraging it elsewhere.
The bottom line
Housing doesn’t get built because governments announce ambitious targets.
It gets built because someone is prepared to risk their own money.
And that’s the part of the housing equation we seem increasingly willing to forget.
