The Global Force Behind Australian Property’s ‘Hotspots’
How Select Landlords Are Cashing in On Soaring Rents…

View the full article here or read on below

(Written for Cycles Trends & Forecasts, Port Phillip Publishing) 

By Catherine Cashmore

There is one big technical revolution of this real estate cycle.  We’ve become so accustomed to it that already that we’re beginning to take it for granted.

What am I talking about? The answer is the sharing economy. Sharing assets and services with strangers via the Internet is cheaper and easier than ever before.

And it’s happening on a massive scale.

You name it and you can get it. Think cars, bikes, tools and cleaning services…to name a few. The company’s flourishing in this ‘new’ economy are ones like Lyft, TaskRabbit, LendingClub, DogVacay…the list is endless.

The Wall Street Journal reported this month on global vehicle giant General Motors, which is offering a Netflix-style on demand membership for its vehicles.

Drivers can rotate through different car models for a monthly fee. The ‘ownership’ economy is changing.

This sharing economy can be full of grey areas that are not easy for the government to regulate or, more importantly for them, tax.

Governments worldwide have done everything in their power to prevent or slow the rise. Australia is no exception.

Take Uber as an example.

Taxi companies and governments have subjected it to ongoing  protests and legal action around the world since it launched in 2010.

The loudest protests are from the taxi licence holders who try everything they can to preserve their value.  

Uber is destroying the value of these licenses through competition.

In 2012,the average cost of a taxi licence in Melbourne was $500,000. That’s the same price as an inner city apartment, and double the price paid in 2002.

Yet eighty per cent of the taxi licence holders in Melbourne did not run taxi services.  

Actual taxi drivers were typically left paying the licence holder up to 50% of their fair. Some were often lucky to earn $8 per hour.

The restriction on the number of taxi licences was totally unnecessary. It created large windfalls for the licence holders .  Customers paid high prices for a poor service and drivers were unable to afford their own licences.

When Victoria legalised Uber in 2016 the rules of the game had to change.

Government are now deregulating industry and introducing a single registration for all taxi and ride-sharing services.

Taxi licence holders have been compensated $100,000 for a first licence and $50,000 for a second. This is a fraction of what they paid.

The outrage from licence holders has been tremendous.  Taxi convoys holding up Melbourne’s traffic during peak hour.

‘Lets cause some disruption,’ the group wrote on Facebook.

“The government can dismantle the industry if they choose, but we as licence holders should not have to pay the price for industry reform,” the group’s spokeswoman, Linda De Melis, told ABC 774.”

A change in government policy has all but wiped away the value.

The largest government granted license of all is the right to collect the economic rent of land.

Yep, real estate.

There is another area where this sharing economy is having profound influence…and yet most of the commentators in the mainstream press don’t even see it, let alone understand it.  

It’s called AirBnB…and it’s making some landlords prodigious profits and changing property markets worldwide.  

This Backlash Can’t Prevent Sharing Boom

I'm travelling to Berlin later this year on business. Normally I'd book accommodation through Airbnb.  However, in May 2016, Berlin authorities banned residents renting to tourists through AirBNB.

A German law allowed them to do this. It’s called – *deep breath* - Zweckentfremdung von Wohnraum (or ZwVbG for short). It translates as the ‘prevention of the elimination of housing.’

The law is intended to stop people turning long-term rental accommodation into short-term holiday lets.

Berlin was the Airbnb capital of Germany prior to this law being implemented in the city.  In 2015, 20,000 Berliners let out their apartments through AirBNB.

11,700 units were uploaded onto the website daily.

Most of these lets were approximately 55 euros per night. That offered a considerable saving compared to hotel accommodation, and  was an outright win for tourists and travellers.

Locals have now been instructed to anonymously report any suspected lawbreakers.  Offenders can be fined up to €100,000.

Whether the ban will last or not is questionable.

A German court recently ruled that Berliners could rent out their second home  when they’re living in their primary residence.

Also, already there are reports of hundreds of Airbnb landlords flouting the law.  

Berlin is not the only city to attempt to restrict the use of Airbnb.

In October 2016, New York made it illegal to advertise an apartment for rent for less than 30 days.

Airbnb listings dropped only marginally, despite the prospect of increased fines.

Most hosts found loopholes that allowed them to skirt around the restrictions. Regulating the industry is an expensive and time-consuming business for city authorities.

Here’s the catch when it comes to property for the sharing economy…

You and I as consumers benefit from increased competition and monopolies are prevented.

However, unlike taxis, tools or services,  land is fixed in location and fixed in supply.

Airbnb has drastically reduced the cost of holiday accommodation for consumers…but there’s a price.

Homes previously available for long term tenants are disappearing from the market.

That’s why government attempts to restrict services such as Airbnb usually fall under the banner of ‘housing affordability.’

However, Airbnb is not the reason housing is unaffordable.

To create affordable housing, land prices must reduce.

Why You Can’t Trust the Government on This

Prime Minister Malcolm Turnbull recently stated that his priority is to ensure ‘more Australians can afford to buy a home’. He warned there were ‘no quick fixes or silver bullets.’

Yes there are.

The best way to do this is with a land tax, and, ideally, removing taxes elsewhere to compensate.

If you tax the land, supply will immediately increase while the price of land will decrease.  If you’ve been reading CTF for some time you will be very familiar with this concept by now.

Here’s the political reality. If the government were to implement a broad based land tax they would not be fighting against a handful of taxi licence holders.

Australia’s homeowning middle class would revolt with staunch opposition. We’ve all been led by the culture and the tax system  to use rising land values to fund our retirement.

And of course the Finance, Insurance and Real Estate industry (the FIRE sector) would use its powerful lobbying pressure to prevent this from happening even if taxpayers wanted it anyway – which they don’t.

The real winners of the property boom and bust cycle are companies within this sector,

This is a reason land tax is a policy government have repeatedly refused to implement - and why the cycle will continue into 2026.

The ‘False Signal’ From Rental Yields

Australia’s tax policy has sent  land prices in Melbourne, Sydney and Brisbane to record highs. That means yields are at record lows.

They’re less than 3% in Melbourne, and not much higher in Sydney.

Australia is seeing the softest wage growth on record. This is coupled with historically high levels of new dwelling construction. This ensures these low yields won’t change anytime soon.

A gross rental yield of 3% implies a net rental yield of around 1%. This is one management fees, maintenance, tax and so forth are accounted for.  

Investment in residential housing has an average price to earnings ratio of more than 100.

That’s high…very high. In theory, your capital is much better served elsewhere.

Obviously, investors are not in the property market for rental income. They’re in it for capital gains.

However, mainstream economists site low rental yields to define a ‘bubble’ in real estate prices.  

From this follows that investors will no longer be able to afford their debt repayments if interest rates rise…and the market will collapse.

What those calling a crash early in the cycle don’t See

However, Airbnb and other flat sharing services are upending the dynamic behind this theory.

Here’s why. Property owners can can achieve 3 times the rent form short-term tenants compared to long term lets.

Rents are soaring in some of Sydney’s hottest Airbnb hotspots. This is by up to five times as much as long-term city rentals. The bayside suburbs of Tamarama and Bronte are good examples.

One in five homes in Tamarama are listed on Airbnb.  Bondi Beach comes a close second.

In Bondi, studio apartments can fetch $300 per night on Airbnb, and rarely see any periods of vacancy. These rent for $480 per week on long term leases.

Other popular suburbs include, Coogee, Clovelly, Darlinghurst, Surry Hills Manly, Sydney, Paddington, Redfern, Potts Point, Newtown, Mosman, Maroubra, Bondi Junction, Pyrmont, Waterloo and Avalo.

The number of Sydney Airbnb advertisements has exploded. There were around 8000 in 2015 to a current total of 23,615.

And it's not just upmarket bayside properties.

What New Victorian Laws Means for Property

Over the Labour Day weekend, the Victoria Government issued a press release informing of changes to the existing planning and zoning laws.

Melbourne now has four major zones – the most restrictive being the Neighbourhood Residential Zone.  

In most suburbs, properties in a Neighbourhood Residential Zone could only be subdivided into a maximum of two lots.

However, the new laws override these changes.  

There is now no limit to how many properties can be constructed on a lot – including Neighbourhood Residential Zones - providing each subdivision has a certain percentage of its land set-aside as a permeable garden area.  

Note that this does not include the driveway.

If the block being subdivided is between 400-500sqm, 25% of each subdivision must be a permeable garden area.  

If between 501-650sqm, the figure is 30% and if over 650sqm, it’s 35%.

The changes are intended to ‘save the backyar’” – however, it’s likely they will also spur an increased number of apartment blocks.  Developers will attempt to maximise the number of units they can construct on a site without falling under the “backyard” regulations.

Additionally, local councils cannot override the new laws.

Whether you agree with the changes or not, one side of the story that has not been covered at all, is how the changes will, and are affecting land prices.

For example, some blocks that could previously accommodate 3 or 4 dwellings quite comfortably, are now restricted to two dwellings only.  There is not enough room to dedicate a percentage of garden area to each subdivision, and therefore, the site is not as valuable.

On the other hand, blocks that can comfortably accommodate 3 dwellings, but were restricted to two under the old laws are now worth far more than they had been previously.

Depending on the site, the change in density, is affecting the land price (negatively, or positively) to the tune of 5-10%.

As an example, a week before the changes, I purchased a block of land for a buyer in a Neighbourhood Residential Zone north of Melbourne’s CBD for $625,000.

It was this price because the zoning would only allow for a dual subdivision.

However, under the new laws, it’s now possible to construct three units on the site. Therefore, it’s now worth closer to $750,000  - an overnight windfall gain.

The planning laws are due to come into effect.  Albeit, considering the uproar from developers and town-planners who are still unclear on the specifics, it will not be without staunch protest.

Ultimately, government policy in all capitals is to increase density – therefore, land still remains the best option for investment.  It is the only thing that is reducing in supply, as the population explodes.

From Stamp Duty to Land Tax?

Over the last few days, the Parliamentary Budget Office has costed a proposal to abolish stamp duty and replace it with a broad-based land tax.  Parliament is expected to debate it over the coming weeks as part of their discussions on housing affordability.

This is not the first time the proposal has been debated at a federal level.   State governments periodically discuss it.

There are many benefits to the proposal.

Stamp duty is a powerful incentive to ‘stay put.’  It is a volatile source of revenue, discouraging owners from upsizing or downsizing into accommodation best suited to their needs.

The more often a homeowner sells one property and purchases another - the more tax they will pay.  

Only a very small percentage of the total housing stock transfers annually. Therefore under current policy, tax revenue for community services is collected by penalising a small proportion of homebuyers who want to either upsize or downsize into accommodation better suited to their needs.

In an age where job mobility is essential to long-term employment, stamp duty should have been abolished years ago.

 Every Australian state and federal tax review in memory has recommended abolishing stamp duty and replacing it with a land tax.

In 2010 The Henry Tax review stated: “there is no place for stamp duty in a modern tax system.” Yet so far, ACT has been the only state or territory to act on the recommendations by phasing out stamp duty over a 20-year period.  The results of that transition have been extremely positive.

Increasing land tax rates has deterred housing speculation
Future land tax obligations are already capitalised into lower land prices
Because of this, new home buyers are saving between $1000 and $2000 per year on mortgage costs
New housing construction has remained strong throughout the tax transition period and
Residential rental growth is at historical lows, benefiting renting households

You can read the report here.

Victoria has the highest rate of stamp duty at almost 5 per cent of the purchase price.

The average family buying a home in Melbourne at $660,000 would need to spend around a third of their household disposable income on Stamp Duty.

Yet, in contrast to stamp duty, land tax does not discriminate between long or short holding periods – enhancing the efficiency of market turnover.

Additionally, land tax is a very efficient and stable source of revenue for State Government compared to stamp duty.  It provides state government’s far greater control over public finances.

All of the above sounds very positive and for those without vested interests, changing the policy is effectively a no brainer.

However, land tax also has the effect of lowering land prices – which is never popular.

For those struggling to understand how land tax can reduce land values, a similar concept is recognised by owners of apartments.

When buyers purchase a unit, they expect to pay a yearly corporation fee for maintenance and improvement of the site’s services.

In doing so, it reduces the up front price consumers are willing to pay as they configure the fee into their budget - yet it is also recognised as an investment, as the benefits and any subsequent improvements help attract future purchasers.

A broad based land value tax is essentially no different.

In other words, other than the owner of land at the time of implementation, land value taxation is not an economic burden. A well-administered broad-based flat-rate land tax, levied on the unproved value of land has no negative impact to productivity or economic activity.

Despite this, there is little education in the mainstream media to convince owners, who have been encouraged to speculate on land to fund their retirement to embrace the policy change.

A quick look at the comments section under the media outlets that covered the story demonstrates the outrage.

For this reason – it is highly unlikely that the changes will be administered.  

We have another two years of good growth prior to the mid cycle lull.  It’s not time for a slowdown in house/land prices just yet.

What will happen instead to assist affordability?

The government will pump the demand side of the equation.  Removal of stamp duty for first homebuyers, shared equity schemes, homebuyer saving accounts – all of which are on the table for discussion and some of which have already been implemented by state governments.  

All of the above will keep the cycle rocking along into 2026.

A Vacancy Tax

The Victorian have established vacancy tax aimed at preventing investors purchasing for financial gain only, without renting their accommodation to a long-term tenant.  Other governments are threatening to follow suite.

The reforms have been spurred in part by the Speculative Vacancies report I write each year which demonstrates the thousands of empty properties in the greater metropolitan area of Melbourne that are vacant for 12 months or more.

Administration of the laws will be based on self-reporting.  

To keep owners honest, a certain number of investors will be audited each year, and required to prove with rental receipts and leasing documents, that there is a long term tenant renting the property.

How successful the reforms will be is yet to be seen – however, I’ll be monitoring it each year with updates to the Speculative Vacancies report.

Why do vendors keep their properties vacant?

Aside from the fact hat that yields are at record lows… There is already a vast supply of apartments on the rental market that struggle to attract a tenant.

This means, that in order to abide by the laws, rents must be dropped to a level that will accommodate very low-income individuals.  

New apartments are like a new car – it is easier to maintain their value if they remain in pristine condition.  Therefore, attracting a tenant at any cost is not going to be favourable to many investors and could have a significant downward impact on rents.

Ultimately – in most cities (perhaps barring Sydney, which is far more geographically constrained) apartments remain a poor investment for this cycle.  

The supply over the next 10 years will increase substantially – therefore, whilst comparatively affordable land is still available, it should be the first option. By the time the next cycle roles around, land within 20km of Melbourne and Brisbane’s CBDs will have escalated in price considerably.

An old rentable house on a block of land with good development potential is still the golden egg in terms of attracting capital growth.

More importantly, the older houses on unbroken blocks of land are in shorter supply than apartments.  Therefore attracting a long term tenant is rarely an issue. House yields are unlikely to be negatively affected by the vacancy tax.

As for the effect of the tax on property prices - it’s unlikely demand will drop at this stage of the cycle.  

The Victorian government have recently removed stamp duty for first home buyers on purchases up to 600K. They have also introduced a shared equity scheme to assist people getting into the market.  Therefore, both policies will likely more than override any depression in prices.

Airbnb has three types of property listings: entire homes, private rooms and shared rooms.

39% of Sydney’s Airbnb listings are rooms in shared accommodation. The average price per night is $211.

Sydney is the Airbnb capital of Australia. Melbourne is also one of the top 10 cities for global travellers on Airbnb.

Melbourne has 12,174 Airbnb listings.  44% are rooms in shared accommodation with an average price per night of $138.

In Melbourne, the boom in high-density development in the CBD has resulted in an oversupply of poor quality accommodation. The apartments are small – around 60sqm for a two bedroom. Rooms often lack natural light, and storage facilities.  

This supply does not appeal to long-term tenants. It is attractive to itinerant tenants seeking affordable inner city accommodation.

Melbourne’s QVI apartments has a number of 2 bedroom units operating as dormitories, sleeping 4 people to a room for example.

Little has changed since the 19th century when Jacob Riis shocked readers with factual descriptions of slum conditions in New York City. His book How the Other Half Lives was published in 1890.

He wrote…

‘Closets became bedrooms for multiple people. Small houses built for one family often became the residence for ten or more families, all of which were paying high rents.”

Here’s a shot of that…

 
(How the Other Half Lives, (Picture) 1890)

Now compare to Melbourne 2017...

(The Age – 2016)

 No Australian Property Investor Has Seen This in Decades

 Airbnb is giving you as an investor the chance to achieve something that has not been possible for decades.

That’s the windfall benefits of capital growth in Australian property, as well as a positive rental income.

It’s transforming the real estate market and spurring property prices even higher in the right locations.

One in 6 Australian’s has an Airbnb account.

Even retirees are renting out spare rooms and supplementing their income doing this.

Sixty-year-old hosts are the fastest growing demographic on Airbnb.   They have grown at a rate of 20 per cent in the past year alone.

Fifty to 90-year-olds now make up a third of Airbnb hosts – earning just under $6000 a year from renting out spare rooms.

Sixty year old hosts are also the most likely to get the maximum five-star reviews from guests followed by 50 to 59-year-olds.

In Melbourne, 4.7% of all rental properties have been removed from the rental market and placed on the Airbnb registry.

That’s significant.

Government can’t monitor the Airbnb market unless they have figures on how many units are being used exclusively as Airbnb short term lets.

I’ve given them a head start for Melbourne.

The following table shows the local government areas in Melbourne where Airbnb is most popular.

The second column shows the total number of investor owned properties.

The third column shows the total number of Airbnb properties.

The fourth column the total number of units and houses that are solely dedicated to Airbnb rentals.

The final column is the percentage of units of the total number of investor owned properties.

As you can see – the percentages are still small.  There’s plenty of room for Airbnb to increase its capacity in Melbourne, assuming Government policy does not interfere.  

There are risks here too.

Only recently, the State Revenue Office slapped an elderly couple with huge fine for renting their home on Airbnb for a short period of time – something they do every year whilst visiting family in Tasmania.

The State Revenue Office claimed they rented the house out for a year because they were away on July 1 when the new financial year ticked over.  Therefore, it was claimed that they should have been paying land tax.

The same laws apply to people who purchase a property and rent out the spare bedroom to help pay the mortgage.  However, unless it’s self-reported, auditing people that rent rooms through Airbnb is not an easy task.

Like everything in the sharing economy – laws need to be adapted to accommodate new innovation – and over time, this will happen.

Regardless, Airbnb continues to be a massive game changer in the property market.

If you’re interested in this, approach a good buyer’s advocate and see if they’re tracking this development in your area of interest.

It’s going to be a doozy of a cycle into 2026.