Why are we subsidising short-term lets?

As rents soar across Australia there is a quirk in tax law that can only be making matters worse

Rents have gone up by 10 per cent or more in some areas thanks to one of the most fundamental economic rules; when demand outstrips supply, prices and profits go up.  This applies to lettuce and letting homes alike.

But nothing is that simple in housing, where politics, economics, individual wealth (or lack thereof) and social policy intersect if not collide. The same applies to taxation.

Thus, in the same week that our nation’s housing ministers met to discuss the national housing crisis, the Australian Tax Office let it be known that it has set its sights, once again, on holiday let tax evaders.  There’s more on that in this story.

The peaks and troughs of rents and rental availability affect apartment owners, tenants and prospective purchasers more than most.

Half the apartments in Australia, if not more, are investment properties.  Also, units are the first option for first-time home buyers. 

And when it comes to inner-city holiday rentals, flats lead the way again. Sydney strata schemes have the option to restrict holiday lets but, pre-covid, Docklands in Melbourne had buildings with one-third or more of their homes given over to short-term rentals. 

There are myriad reasons why rents are spinning out of control, and they range from the apartment glut we were warned about having failed to eventuate, to population decline being a cliff over which we are yet to fall.

And housing is a crisis with no obvious solution. Even the most inventive ideas – like the government’s plan to co-own homes with first-time buyers – have the potential to push prices up for those who don’t qualify for support, leaving home ownership just out of reach for too many people. 

The great distortion of the big picture is negative gearing; that generous allowance that means whatever you spend on your investment property can be offset against your personal income tax.

And that exposes one of the greatest ironies of property investment. Negative gearing was introduced to encourage private “mum and dad” investors to finance the building of residential rental properties.

But it has been proven without question that holiday rentals take residential lets out of the marker. More holiday lets mean fewer residential lets, and that means rents go up.

So if we have a homelessness and housing availability crisis, why are Australian taxpayers subsidising short-term letting?

One Flatchatter has already suggested that the government could remove negative gearing from holiday lets so that residential tenants and tourists can compete on a level playing field.

Genuine sharers – people letting a room in their homes – and residential landlords would not be affected, only the “disruptors” who have been given free rein in our fragile housing markets.

It would be a federal response to a conundrum that has our various state governments paralysed as they try to balance the lure of tourist dollars with the need to house their populations.

Okay, it won’t resolve the housing crisis – that will take more than a few repurposed Airbnbs – but it might inject a shot of economic logic to the debate.

A version of this column first appeared in the Australian Financial Review.