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Housing Stock: Investment in residential rental property
Trends in rental investment
In the early 1980s there were large decreases in the levels of investment in residential rental property3. This was mainly due to four factors: low levels of investor confidence due to poor capital gains in most capital city markets in the early 1980s; competition from packaged investment opportunities, such as cash management trusts and property trusts, which gave small investors more choice; the introduction of capital gains tax in 1985; and the removal of some negative gearing concessions in 19851. These factors led to shortages of private rental accommodation which caused problems for renters, particularly those on low incomes. This in turn led to an increase in demand for public housing (see Australian Social Trends 1994, Public tenants).
During the late 1980s, investment in residential rental property increased1. Three main factors caused this increase: the stock market crash of 1987 led investors to seek more traditional forms of investment; the change to negative gearing was reversed, which again meant that any expenses incurred on a rental property could be offset against other income to reduce tax; and new financing options and reductions in home loan interest rates attracted investors back to investing in residential rental property.
In 1993, 752,100 people (6% of those aged 18 and over) owned, or were buying, at least one residential rental property. Men were more likely to invest in residential property than women, 54% compared to 46%.
People aged 45-54 were most likely to be investors in residential rental property. In 1993, 10% of all people aged 45-54 were investors (11% of men and 9% of women). Investment in residential property may be highest in this age group for four reasons. Firstly, this is the peak earning age for most people. Secondly, the demands on people's income reduce as their children begin to leave home and require less financial support from their parents. 60% of investors in this age group were married without dependent children. Thirdly, at this age people have large equity in their own home and are able to borrow against that. Finally, at this age people are securing investments to give them financial security for their retirement.
Over half of all investors (57%) purchased their most recent property with their spouse (including de facto). A further 27% purchased by themselves and 7% with another relative. The remaining 9% of investors purchased their most recent property either in a business partnership, as a principal in a company, or through some other arrangement.
Among all people who purchased their first residential rental property since 1983, more than 70% were under 45 years of age. The majority of investors (58%) purchased their first residential rental property using a loan or mortgage. A further 27% became investors by renting out their former homes.
PROPORTION OF ALL PEOPLE WHO ARE INVESTORS IN RESIDENTIAL RENTAL PROPERTY, 1993
Almost half (46%) of all investors had a weekly income of less than $480. This was due to the high proportion of female investors with lower incomes. Many of these women were joint investors with their spouses who may have had higher incomes than theirs. Less than one-third of male investors had a weekly income of less than $480 compared to almost two-thirds of female investors.
Over half (51%) of all rental investors reported that their main source of income was a wage or salary. 13% of investors reported that their main source of income was investments or other sources. People whose main source of income was from investments tended to be older than other rental investors. 45% of rental investors aged 65 and over reported that investments were their main source of income. This may be due to people investing in rental property as a source of retirement income.
In 1993, 78% of investors had only one rental property and 13% owned two. 4% owned five or more. The likelihood of owning more than one investment property rose with the weekly income of investors.
MAIN SOURCE OF INCOME OF INVESTORS IN RESIDENTIAL RENTAL PROPERTY, 1994
Source: Survey of Rental Investors
Type of rental property
In 1993, 62% of the residential rental properties most recently acquired by investors were separate houses and a further 25% were single flats/home units. In comparison, the stock of dwellings counted in the 1991 Census of Population and Housing consisted of 78% separate houses and 11% flats and units (see Australian Social Trends 1994, Housing the population). Individual investors were more likely to invest in single flats or units than those investing with other people. Investors who had acted as the principal in a company were more likely than other investors to invest in blocks of flats or units.
The type of property people invested in varied according to location. The majority (62%) of people investing outside their own state or territory bought high density property (flats, units, townhouses). Those investing within their own postcode or capital city/region were more likely to invest in a separate house.
In 1993, the median estimated market value of residential rental properties was $118,000. 18% of investors estimated the value of their most recently acquired property to be $170,000 or more. 20% of investors estimated the value of their most recently acquired property to be less than $85,000.
The median weekly rent received from the most recently acquired property was $145. 12% of investors reported receiving $230 or more a week. 18% of investors reported receiving less than $110 a week.
TYPE OF OWNERSHIP OF MOST RECENTLY ACQUIRED RESIDENTIAL RENTAL PROPERTY, 1993
Location of investment properties
In 1993, most investors (97%) invested in property in their own state or territory. 80% of these people invested in the same capital city or region, 29% in their own postcode.
People were more likely to manage their investment property themselves if it was close to their usual place of residence. For properties in their postcode, 54% of investors managed the property themselves. Of those people who invested in residential rental property outside the state or territory of their usual residence, almost three-quarters had their property managed by a real estate agent.
Reasons for investing
In 1993, 52% of investors reported that they invested in residential rental property for a secure long-term investment. This was the most common reason given by investors of all ages.
The other reasons why people invest in residential rental property varied with age. Investors aged under 45 were more likely than those in older age groups to say that they had invested to reduce their taxable income or for future capital gains. People aged 45-54 were more likely to have invested for their retirement (15%). Investors aged 55 and over were more likely to have invested to produce income from rent.
REASONS FOR INVESTING IN RESIDENTIAL RENTAL PROPERTY, 1993
(b) Proportions do not add to 100% since investors were asked to report all reasons for investing.
Source: Survey of Rental Investors
In 1993, the Australian Capital Territory and Northern Territory had the highest proportion of investors in residential rental property (9%). This may be partly due to these territories having the highest average total weekly earnings of all employees, $609 in the ACT and $566 in NT compared to $526 for all employees (see Income - national summary table). However, investors from these territories only accounted for 4% of all investors.
INVESTORS AND STATE OF USUAL RESIDENCE, 1993
In 1993, 3% of people reported that they intended to invest in residential rental property sometime in the next two years. Of these 35% were current investors planning to purchase another property. The majority of intending investors were investing for a secure long-term investment (63%) and 24% were investing for their retirement.
In 1993, intending investors had a higher income than current investors. 35% of intending investors had a weekly income of less than $480 compared to 46% of all current investors.
1 Elton, B and Associates Pty. Ltd. (1991) The National Housing Strategy; The supply side of the private rental market.
2 Survey of Rental Tenants.
3 Indecs (1992) State of Play 7: the Australian economic debate Allen and Unwin, Sydney.