Do ageing landlords pose a problem for the property market?

According to the Australian Taxation Office’s latest statistics, more than half of all Australian property investors are aged over 50, with those aged over 60 accounting for the largest share of any age group. This trend has been accelerating over the past 20 years.

A landlord’s age might seem like a trivial detail, but as PropTrack economist Anne Flaherty recently explained, from a macro perspective an ageing landlord population has a material effect on the rental market. In a time when vacancy rates are tight and the cost of rent rising almost everywhere, a lot depends on what a landlord is hoping to get out of owning a property.

As Ms Flaherty noted, broadly speaking there are two main strategies when it comes to investing in real estate, and investors tend to prioritise one or the other: generating yield through rental income or achieving capital growth.

“While both strategies can be, and often are, simultaneously achieved, typically an investor is more motivated by one over the other,” Ms Flaherty said.

Age is one of the factors that might influence what an investor aims to achieve with a rental property, given that the length of time that an investor intends to hold a property is important in determining their strategy, while financial factors at different stages in life also have an impact.

“A younger investor, with many years left in the workforce, is more likely to favour a capital growth strategy,” Ms Flaherty said.

“In this case, they are less concerned if the costs associated with holding an investment property are greater than the rental income received, a circumstance known as negative gearing,” she remarked.

In that instance, negative gearing also comes with the benefit of reducing an investor’s taxable income.

Australians nearing retirement age, on the other hand, are often less focused on chasing capital growth and taking advantage of negative gearing, instead often hoping to have properties positively geared so that they can earn regular income via rent.

While that may have some impact on the choices that a landlord makes with regards to setting a rental price, the bigger problem is that in the past few years, the net yield from owning investment properties has fallen, even while rents have been rising significantly.

The bottom line is that the costs associated with holding rental properties have risen, serving to deter investors who prioritise high monthly rental yields.

Ms Flaherty looked at some of those rising costs that have pushed investors from positive into negative territory.

“Interest-only home loan rates to investors, for example, have risen from a low of 3.2 per cent in April 2022 to 5.8 per cent as of June 2023. For a loan of $400,000, this represents an extra $10,640 in repayments per year, or $205 per week.

“Land tax is another expense that has jumped significantly. The median price of a property was sitting 33 per cent higher in July of this year compared to March 2020 at the onset of the pandemic. While this is fantastic news for anyone looking to sell, for those holding onto their properties it means a higher land tax bill,” she said.

Ms Flaherty added that costs associated with insurance, strata and compliance have also risen significantly in recent years.

According to realestate.com.au’s latest Property Seeker Survey, 32 per cent of landlords now believe that the returns from investing in property are not worth the effort. Coupled with the increasing attractiveness of rising interest rates on bonds or savings accounts, it appears that investors are increasingly parking their money elsewhere.

“Over the past five years the share of investors selling has been higher than the share buying – a trend that has accelerated post-COVID,” Ms Flaherty noted.

For owner-occupier buyers this can be a good thing, but as Ms Flaherty pointed out: “Not everyone is in a position to buy, and currently about one-third of Australians rent, a share that has been growing over time”.

Now, older Australians are finding that their reasons for getting into property investing are less compelling, and at a time when younger investors are a small cohort and rental vacancies are tight, this could spell disaster for the rental market.

“Given the current shortage of rental properties, the fact we are likely to see more older investors sell up as they enter retirement is cause for concern, particularly in light of the rapid population growth Australia is now experiencing,” Ms Flaherty said.

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