I want to rent in Australia

August 17, 2010

Over recent decades, public companies have steadily paid out fewer and fewer dividends, with little if any complaining from shareholders. They often prefer it when the money is retained in the company or used for share buybacks, because that way they don’t need to pay taxes on their dividend income.

Someone should remind Australians that houses are not, in this respect, like stocks. It would be wonderful for landlords if they could simply capitalize their rental income, seeing it reflected in a higher value for their property rather than having to be paid out in taxable income. But of course that can’t happen: whether or not a house increases in value is entirely unrelated to the amount of rental income that a landlord manages to extract from it.

Even so, reports Clancy Yates,

According to Tax Office figures, the proportion of taxpayers who own rental property has swelled from 6.5 per cent in 1989 to 13.5 per cent in 2009, two thirds of whom claim a loss on their investments.

Why this doubling in the number of Australian landlords, if they’re not making any money renting out these houses? The psychology is obvious: it doesn’t matter if I lose money on a cashflow basis, so long as I’m making money in terms of rising home equity. Of course, this is a classic bubble mentality, and is fundamentally unsustainable. I just hope that the banks have done a very solid job underwriting the mortgages on these rental properties.

(Via Kedrosky)


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