As rents and interest rates rise in lockstep, what happens to the rental market? You can imagine either outcome: landlords love the high rents and rent out more properties, or they fear the high interest repayments and get out altogether.
Both are possible, of course, with indebted property owners getting out of the game while others with plenty of cash pay down their debts to stay in the market. Equally, some may be quietly pleased with high interest repayments and their losses on rental properties because they can claim higher deductions from their income. They call this negative gearing.
The question of landlord profits is one we need to understand. Is being a landlord profitable? The Tax Office puts out the statistics each year that let us answer the question. The answer is: yes — for some!
As the chart below shows, running a rental property profitably is a strategy most used by landlords on lower incomes. Whereas making a loss — and deducting that loss from your income — is often used by people on higher incomes.
The chart shows that 1% of fast-food cooks claim rental profits and losses on their tax, and they make, on average, a small profit. Meanwhile, 42% of surgeons claim rental profits or losses on their tax, and they make, on average, a big loss.
More dots are below the zero line than above, suggesting most occupations run their rental properties at a loss.
There’s one big exception. The biggest circle on the chart is for “Occupation blank”. That will include a few miscellaneous stragglers, but its biggest component is retirees. This group is very large and highly likely to own a rental property, with 21% claiming rental profits or losses on tax. It is not a group with high taxable income, so it makes sense it chooses to run properties at a profit.
If you’re a surgeon making $400,000 a year, every dollar you lose on your rental property saves you 45 cents in tax. But if you’re a retiree making $40,000, every dollar you lose on a rental property saves you just 15 cents in tax. Both groups still lose money by running their rental at a loss, but the loss is mitigated much more for high earners. They usually absorb the loss by gaining on the capital value of the home.
Pensioner landlords
Retirees are less likely to have rental interest costs because they’ve been around longer and have paid off their properties. The lack of mortgage means they run their rentals at a profit, and also means they won’t be affected by the recent rate rises that have sent mortgage repayments into the stratosphere for younger families.
As the next chart shows, retirees don’t have exclusive domain over running a rental property at a profit. Lots of occupations do. The chart shows the top 30 occupations for declaring rental income, and in each category there are loss-makers and profit-makers.
The latest official statistics show lending for investment properties is growing faster than lending for first-home buying. But that doesn’t necessarily mean a net increase in rental properties. If the sales pipeline is comprised more of rental properties than owner-occupiers, the fact more investors are buying could just show investment properties are moving from one landlord to another.
Rents, meanwhile, are still rising, up 6.3% over the year to May 2023 and rapidly becoming the most significant item in the CPI releases. Renters are in a very tough position, and if landlords with a desire to profit from their rental properties are on the rise, that position could get even tougher.
Can you see a solution to the housing and rental crisis? Let us know your thoughts by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.
It’s not about the profit on the rent in most cases.
It’s about the ridiculous increase in property prices that sets up landlords for the longer term.
And it’s about Australia’s absolute obsession with owning investment properties.
With rental prices though there has to be an upper limit.
If the most people can afford is $1k per week and the landlord wants/needs (to cover their mortgage) $2k per week, they’re only going to get $1k per week.
Ultimately in this absolutely bonkers property market, wages have to, at some stage, be a factor in setting prices.
There may not be any connection really between wages and buying capacity with banks willing to lend multiple times a person’s salary and 100% mortgages, but nobody’s borrowing (at least directly) to pay their rent.
Even the notion that a retired person can just rock up at auctions and outbid actual working human beings is just farcical.
The whole thing is farcical. It doesn’t pay to work for a living in Australia. It’s all about flipping properties. People have actually quit actual paying jobs and just become property speculators on existing properties (not developers, speculators so they’re adding no new stock).
We lost an actual teacher:
https://www.news.com.au/finance/real-estate/buying/former-music-teachers-secret-and-journey-to-20m-property-success/news-story/641ab827102fc079d724af09f16485f3
and now we have one less teacher and housing is less affordable for other teachers…
We lost a software engineer and an accountant:
https://www.news.com.au/finance/real-estate/buying/how-sydney-couple-bought-4-properties-worth-22m/news-story/39c057ac234f28ff801abdef7dc6d630
We are actually creating both a housing shortage and skills shortage (and $2trn in household debt – that’s the one that goes ‘bang”).
“If you’re a surgeon making $400,000 a year, every dollar you lose on your rental property saves you 45 cents in tax. ”
By my arithmetic, it’s also 55 cents in the dollar as an outright loss. Even on $400,000 per year, you need to be able to wear those losses for long enough to ensure that you achieve a capital gain which outweighs the cash losses, and delivers a decent return over the life of the investment.
Not sure if that was directed to me but it’s why this doesn’t really work for the mythical “mum and dad” investors.
It works for them because a house in many areas appreciates more – much more sometimes – in a year than their salaries.
So long as they can just keep those payments going, the payoff at the end – in much more lightly taxed capital gains (untaxed if it has been a PPoR within 7 years) – will often make up for it.
Except these aren’t real losses, they are accounting devices built on hand-waving concepts like asset depreciation and deductible-interest loans. These paper losses are then used to negate income from other sources, a uniquely Australian rort. Remove negative gearing, reduce tax concessions from the second investment property, and make the poor landlords sell into the market to bring home ownership back.
You could make an argument depreciation is hand-waving, but mortgage payments, maintenance costs, agent commissions, etc, are very much real costs (ie: you need actual money on hand to do it) that don’t magically disappear because they are tax deductible.
In Australia, you hold a property in your own name ONLY IF you want to minimise tax (negatively gear/claim a loss). If you don’t then it means you are either financially illiterate or worse, a person of integrity.
I assume this data excludes properties owned through trust funds and/or as a business?
How many of those who claim a rental loss are also trust beneficiaries, trustees or own a business? Most properties I have ever rented were businesses or trusts. Is it possible to look at trustee, trust beneficiary, business owner by profession I wonder?
There seems to be huge poolings of wealth but why is it so hard to track?
Just guessin’ but perhaps because the majority of politicians, federal and especially state, are landlords renting multiple properties?
These were often acquired via negative gearing to reduce those tiresome income taxes on their excessive salaries & perks, paid for by the votes, a third of whom also rent.
Often from the same amoral graspers & grifters.
Jason’t table in the article suggests that only 21% of legislators own an investment property and on average these are rented at a gain.
This is a lot of money flowing in one narrow direction.
What’s the biggish circle to the right of the word legislator?
I too, was wondering about that.
Unfortunately we are no going to a solution from our politicians. Being owners of multiple properties in most cases they are big beneficiaries of the status qo. If they suddenly had a rare moment of feeling like they should actually do something for Australia and proposed legislation that would fix this they would have to recuse themselves leaving only a few to vote or vote against their own interests. The evidence to date is that our politicians never vote against their own interests which are very dear to them. Is there such a thing as a quorum in parliament? If all the properties owners recused themselves could the remaining 2 or 3 pass any legislation?