Looking after mums and dads - part 1

Mums and dads need looking after. We know this because every time someone comes up with a way to make renting fair we hear a caution - we can't go around doing things that will hurt mum and dad investors. They've bought into the property market at considerable expense, in good faith, with an expectation that policy settings will remain as they are. After all, they're just trying to build themselves a little wealth.

This is never more true than when we're talking about tax reform. As it happens, we're talking about that right now, so it's worth exploring what a "mum and dad investor" really looks like.

One of the ways we can do this is by looking at data collected by the Australian Tax Office. We can count the number of taxpayers who have declared income from a rental property as part of their end-of-financial-year returns.

If we like, we can also divide the data up into different bands depending on what those taxpayers' taxable incomes are. Current discussion around tax reform has been conditioned by just such a division. The Property Council of Australia recently asserted "negative gearing is the way that many mums and dads get into the housing market to build their prosperity." Borrowing from a 2014 statement from the Housing Industry Association, they went on to say:

Two million Australians own an investment property. Two thirds of property investors who benefit from negative gearing earn a taxable income of less than $80,00 a year. These are not high income earners. There are 840,00 Australians with taxable incomes below $80,000 a year who negative gear. This includes 53,800 teachers, 52,000 retail workers, 35,900 nurses and midwives, 22,600 hospitality workers and 10,400 emergency service workers.

Commentators such as the ABC's Michael Janda and SMH's Peter Martin have pointed out that a reference to "taxable income" is disingenuous, precisely because negative gearing is a method of reducing taxable incomes. But the conversation hasn't moved far from this point. Other than the kinds of vocation these "mums and dads" might find themselves in, we still don't know much about them.

Treasurer Scott Morrison took us further when, as Social Services Minister back in July 2015, he said "private rental accommodation is supported by a large pool of mum and dad investors making private rental stock available through negative gearing. By number, almost 80% of these investors are middle income Australians earning $80,000 a year or less, owning just one property. They are school teachers, police officers, nurses and office workers saving and investing to provide for their financial security."

Note that important distinction - middle income Australians owning just one property. We can see what Morrison was getting at by looking at another measure in the tax data.

Australian taxpayers with interests in rental property. Source: ATO

The majority of Australian property investors are one-hit-wonders. In 2013-14, the latest year for which data is available, 72.02% of Australia's taxpaying landlords held an interest in only one rental property. This has remained steady for many years, with the number hovering between 72% and 73% since 2005-06. So when we're asked to think about mum and dad investors, we're really being reminded that there are around 1.5million Australians who've indebted themselves to invest in a single rental property. Whether they earn $80,000 or $800,000 before tax is beside the point; what's not beside the point is that they do not have the economies of scale to make adjustments to their investment "strategy" should conditions change. In short, they're amateurs.

What's also not beside the point, but is all too frequently overlooked, is that these are not merely "mums and dads saving and investing to provide for their financial security". They're landlords building wealth by buying up other people's homes. There's a level of social responsibility that comes with that, and there's a legal responsibility too. But for most, the imperative is purely financial, and there's not a lot of interest in acquiring the knowledge or developing the skills required to become a good landlord. Again, these are amateurs.

But while our army of "mum and dad" landlords may not be overly concerned with the social function of the houses they buy, or the people who live in them, there's reason to think more are graduating from amateur to enthusiast when it comes to the "saving and investing" function. A closer look at the tax data, extracted above, reveals an interesting trend: portfolios are growing, and established landlords are taking on additional rental properties at a faster rate than those buying in for the first time.

Growth of interests in rental properties, 2005-06 - 2013-14. Source: ATO

It's not hard to imagine why this might be. New entrants need to sacrifice and save in order to break into the housing market, whereas those with an existing portfolio can simply adjust their equity and debt in order to take on another property. Traditionally, the pathway to residential property investment has been to buy a home to live in, then leverage that home to buy another that someone else lives in - taking advantage of negative gearing while you're at it. Such investors might be induced by capital gains tax discounts to leverage again and buy up more. But, with prices as they are, such a strategy is becoming difficult to follow. First-time buyers are now just as likely to go for an investment property than a home to live in, but either way they're competing with established "mum and dad" investors. Increasingly, these mums and dads are "saving and investing to provide for their financial prosperity" by picking up their second, third, fourth, fifth and sixth investment properties. This is something to keep an eye on.

It's also only part of the story of mum and dads in the rental market, so we'll return to this topic in a later post. We'll explore how these investors have changed the shape of the rental market, and how they've produced a new generation of mums and dads who really do need a helping hand from our tax and housing policies - the ones who live there.