by The Landlord
Westpac bank says that during the past five years house prices have doubled, while rents increased just 14 %, barely keeping pace with inflation and falling as a proportion of the average wage.
A graph in the bank's report shows little change in the relationship between rents and house prices from 1990 to 2002, but from then on house prices begin to pull increasingly further away.
A dramatic fall in rental yields had been cited as evidence the rental housing market must be out of equilibrium, but Westpac economists Brendan O'Donovan and Dominick Stephens said they begged to differ.
The fall in rental yields -- annual rent divided by house price -- was perfectly explainable by the fall in mortgage rates since the 1990s and the rise in the top marginal tax rate, they said.
Landlords typically made a loss on rental properties once mortgage interest and other expenses were taken into account.
That loss could be written off against wage or salary income, reducing the landlord's overall taxable income.
Landlords could claim a tax rebate on their losses from a rental property at their marginal tax rate, then when property was sold pocket capital gains tax-free.
With the top marginal rate having increased to 39% from 33%, those earning the highest incomes had more incentive to get into rental property, the report said.
The tax system was effectively subsidising landlords, with the subsidy being partially passed on to tenants in the form of low rents.
House prices had been bid up to reflect the tax break that high-income people could get from owning a rental, Westpac said.
If a low or middle income person aspired to own their own home, they must first outbid a high-income person chasing a tax break.
"It is little wonder, then, that rates of home ownership are falling."
The authors do say that rental yields have now reached their floor, based on current fundamentals, and rental property was fully valued.
House price inflation for rentals was likely to be much more moderate in coming years.
With landlords no longer enjoying such outsized capital gains, rents could rise slightly faster than in recent years.
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