Senator David Pocock's Additional Comments

Introduction

1.1Australia is not building enough houses. Not enough public housing, not enough social and community housing, and not enough private housing.

1.2Supply constraints in the face of growing demand are driving a continued sharp deterioration in the affordability of housing to both buy and rent, tipping more households into mortgage and rental stress and exacerbating the homelessness crisis.

1.3Responding effectively to this crisis requires all governments to pull all available policy levers in response - no single measure will solve it.

1.4Build-to-rent has the capacity - as proven internationally - to play a significant role not only in helping solve the supply challenge but also improving conditions for people renting.

1.5But only if we get the policy settings right.

1.6Evidence provided to the Senate committee suggests the bill requires amendment if it is to meet its objective of increasing the supply of rental housing, including affordable tenancies.

The supply challenge

1.7The Covid-19 pandemic and subsequent inflation and interest rate rises in response have combined to worsen the housing affordability crisis.

1.8As data compiled by the Parliamentary Library shows, housing approvals and commencements have fallen to 10-year lows. At the same time we have seen a huge peak in rates of household formation that goes beyond the post-pandemic surge in migration. Source: Australian Bureau of Statistics, Building Activity Australia March 2024; Australian Bureau of Statistics, Building Approvals Australia July 2024.

Source: Australian Bureau of Statistics, Building Activity Australia March 2024; Australian Bureau of Statistics, Building Approvals Australia July 2024

Source: Australian Bureau of Statistics, Census QuickStats 2001-2021 *excl. visitor only and other non-classifiable households

1.9The National Housing Supply and Affordability Council's State of the Housing System 2024 Report[1] highlights that there is a significant shortfall in new housing supply relative to new demand, with a total shortfall of around 39,000 dwellings over the 6-year projection period.

1.10It points to the fact that the supply of non-market housing has not kept pace with demand for several decades, with social housing as a share of the national housing stock falling by a third over the past 30 years.

1.11The shortfall of social housing in Australia is estimated to be 433,000, with 640,000 Australian households in housing stress, projected to rise to 940,000 by 2041. In the 2021 Census, 116,427 people were identified as homeless, an increase of 13% from the 2016 Census. As of March 2021, there were 154,204 applications on the waiting list for public housing in Australia.

Build-to-rent’s capacity to help solve the supply challenge

1.12As acknowledged in the Chair’s report, there is a long-term trend towards a greater number of Australians renting. They are also renting for longer, meaning amenity and security of tenure are more important than ever.

1.13The capacity for build-to-rent to significantly add to housing supply and improve tenant experience is proven around the world.

1.14In the United States, build-to-rent has been a significant component of the housing market for decades, with around 40% of new housing stock being purpose-built rental housing. This has helped to address the shortage of affordable housing, particularly in urban areas.

1.15In the United Kingdom, build-to-rent has grown significantly in recent years, with over 150,000 units in the pipeline. Build-to-rent has contributed to increased housing supply, improved rental affordability, and greater tenant security. In Germany, build-to-rent has been a long-standing feature of the housing market, with around 60% of the population renting. Build-to-rent has helped to increase housing supply and improve tenant satisfaction.

Limitations with the legislation

1.16Concerningly, during the public hearing of the Senate Economics Legislation Committee on 7 August 2024, officials from Treasury confirmed the government has not quantified how the build-to-rent legislation would add to new supply:

1.17Ms Bultitude (Assistant Secretary, Corporate and International Tax Division, Department of the Treasury) noted that, "Treasury hasn't been able to model additionality of housing because it's such a nascent sector."

1.18At the same public hearing, Mike Zorbas, CEO of the Property Council, stated that, without amendment, the bill would result in no additional investment in build-to-rent developments. He emphasised that the current structure of the bill would not encourage new housing supply, as it does not provide a level playing field for build-to-rent projects compared to other property types.

1.19This view was echoed by Mirvac, one of the biggest proponents in Australia’s nascent build-to-rent sector. As noted in their submission, they established a build-to-rent fund and raised $1.8b including from the Clean Energy Fund Corporate (CEFC) and Japan’s Mitsubishi Estate Asia. While recognising the government’s efforts, Mirvac said “we believe the Bills in their current form will drive capital away from the housing sector in Australia. In addition, this will undo the work of State Governments who in recent years developed a suite of reforms to facilitate the roll out of BTR.”

1.20A number of witnesses also noted the lack of any additional protections for renters in the legislation as drafted and raised concerns about the need to ensure that any tax concessions delivered a tangible affordable housing benefit.

1.21Ani Landau-Ward, Researcher and Lecturer at RMIT University said, "If we're expanding public money on a build-to-rent sector, we should be demanding better and clearer affordability outcomes and better outcomes for tenants with regard to security of tenure and longevity of tenure."

1.22Dr Megan Nethercote, Senior Research Fellow, School of Property and Construction, RMIT University raised a similar point saying, “if there is to be an affordable housing feature in this bill, then there needs to be consideration of how that affordable housing is going to be safeguarded and governed, and audited as well, over that longer term window."

1.23The Property Council, Community Housing Industry Association and National Shelter in a supplementary submission to the inquiry have put forward a joint proposal proposing amendments to the bill to better support the growth of the build-to-rent sector and improve affordability outcomes. The key aspects of the proposal are:

Revising the definition of affordable tenancies to ensure that these are available to moderate income earners with at least 20% of the affordable tenancies available to low-income earners. Income eligibility limits would be specified such that rents are up to 74.9% of market value or no more than 30% of household income, whichever is the lower.

Lowering the managed investment trust (MIT) withholding tax rate concession to 10 per cent and ensuring a level playing field for domestic superfunds.

1.24The Property Council commissioned EY to model a range of supply outcomes from the legislation as drafted and with a variety of proposed amendments. In the absence of any government modelling, this provides the only available indication of impacts on supply from this legislation.

1.25Under this modelling the joint proposal would deliver 105,000 additional homes at a minimal cost to Government (int the form of tax foregone) over a 10-year period of $9.3 million.

1.26Importantly, as the National Rental Affordability Scheme continues to wind down seeing the loss of some 6,750 affordable rental between April and December 2024, by extending the 10% MIT withholding tax rate to existing BTR projects that meet the other eligibility criteria the legislation could unlock over 1,200 affordable tenancies.

1.27Consistent with this joint proposal, Ashurst also recommends in its submission expanding the concessions offered in the bill to projects operational or under construction on or before the May 2023 federal budget announcement.

1.28They, along with the Property Council and the Urban Development Institute of Australia, raise concerns about that the “specific requirements to access the concessions are unduly onerous, and will not act as a sufficient incentive to attract foreign capital into the BTR sector, noting that foreign capital can invest in other jurisdictions, or other Australian real estate sectors, without the onerous requirements to achieve a 15% managed investment trust (MIT) withholding tax rate. This includes, for example, investing in commercial office buildings, or even obtaining a further reduced rate of 10% by investing in clean buildings, which we note the Government intends on expanding to include data centres and warehouses per Budget 2023-2024.”

1.29By addressing both of these issues, requirements to access the concessions and their applicability to existing projects, the bill can have a much greater impact adding to the desperately needed supply of more affordable housing.

Source: Property Council of Australia, Submission 6, [p. 1].

1.30During the public hearing, there was support expressed for the Property Council's proposed amendment to the bill from the Australian Housing and Urban Research Institute (AHURI). While not having had an opportunity to consider the proposal in detail, Mr Whittington said “at the moment, if you have dwellings that are used to provide affordable housing, you are eligible for a 15 per cent MIT withholding rate. Given the general reduction to 15 per cent for build-to-rent assets, it would make sense to provide a further incentive for build-to-rent affordable housing within build-to-rent assets to a lower rate of 10 per cent. That would be comparable to other similar regimes that apply to tax other types of real estate assets that are seen to be advantageous for social or environmental reasons.”

1.31Dr Liam Davies, Research Fellow, Centre for Urban Research, RMIT University Melbourne also makes the point that the additional affordability and tenant benefits under the joint proposal are not currently attached to other housing tax concessions.

1.32In response to my questions asking whether he thought “that the CGT discount and negative gearing should be subject to similar protections around rent and no-cause evictions—all those sorts of things” Dr Davies responded “Absolutely. I think that, if we're giving any form of financial support to the private market, it is reasonable for us to expect a mutual obligation of that service provider. We expect any organisation that receives public money to provide a public benefit. The fact that we are providing billions of dollars per year in support to private investors who are overwhelmingly speculating on shelter and we are expecting nothing in return is a massive waste of public resources.”

1.33A Parliamentary Budget Office analysis requested by the Greens shows the cost to taxpayers, in the form of foregone tax revenue, of subsidising property investment from negative gearing and capital gains tax will total some $165.58bn between 2024-25 and 2033-24.[2]

These concessions are provided with no requirement for any component of affordable housing.

1.34By contrast, the added concession from lowering the MIT withholding rate to 10% being proposed jointly by National Shelter, the Community Housing Industry Association and the Property Council of Australia includes a 10% affordable housing component with some strict guidelines and added benefits to renters. These include management of the affordable tenancies by a registered community housing provider, a prohibition on no cause evictions and five-year leases. This for a concession they model is worth a tiny fraction of that provided through CGT and negative gearing discounts.

1.35In testimony to the public hearing, CHIA CEO Ms Wendy Hayhurst noted that in coming up with the joint proposal, “we've had an open-book approach with the Property Council to look at what that means for the model of build to rent. If we don't get any build to rent, we don't get those affordable homes, so it's really important for us to understand those metrics. We provide affordable housing. We know how much subsidy we require to house low-income households, so we think the proposal we've put forward is very strong.”

1.36In response to questioning from the Chair about the affordability of the homes provided under the Scheme for essential workers, National Shelter CEO Ms Emma Greenhalgh noted, “the work that we have done with CHIA and the Property Council is ensuring that the affordable housing component does also go down the income scale to those that are under the average income. That's been a part of the negotiations that we've had. It's not just sitting at the average incomes that are in the bill or in the regulations but it's also shifting that down into the lower income scale.”

Recommendations

1.37That the bill be passed subject to amendments that would give effect to the Property Council, Community Housing Industry Association and National Shelter joint proposal, including by:

lowering the MIT withholding tax rate to 10 per cent;

revising the definition of affordable tenancies to ensure that these are available to moderate income earners with at least 20% of the affordable tenancies available to low-income earners where income eligibility limits are specified such that rents are up to 74.9% of market value or no more than 30% of household income, whichever is the lower;

requiring the affordable tenancies to be managed in partnership with registered, not-for-profit community housing organisations;

prohibiting the use of ‘no cause’ evictions in all tenancies; and

offering five-year lease terms in all tenancies.

1.38Extend the concessional MIT withholding tax rate to existing build-to-rent projects that were operating or in development prior to the 2023 Budget announcement.

1.39Remove the restriction on availability of the concessional MIT withholding tax rate and limitations on the income on which the concessional MIT withholding tax rate can be obtained.

Senator David Pocock

Independent Senator for the Australian Capital Territory

Footnotes

[1]National Housing Supply and Affordability Council, The State of the Housing System 2024, 3 May 2024, https://nhsac.gov.au/reports-and-submissions/state-housing-system-2024.

[2]Parliamentary Budget Office, Budget analysis: ‘Cost of Negative Gearing and Capital Gains Tax Discount’; 17 June 2024, https://www.pbo.gov.au/sites/default/files/2024-07/Cost%20of%20Negative%20Gearing%20and%20Capital%20Gains%20Tax%20Discount_0.pdf.