Think Twice: Negative Gearing Myths

In my experience, most people who have a loud view about scrapping negative gearing are people who can’t explain what it is, how it works, why it’s bad and how ending it would solve all the problems in the housing industry.

Mostly, what’s in play with this issue is THE POLITICS OF ENVY – that nagging feeling some people have, that others are doing better than they are, or are receiving benefits that they are not, and therefore need to be squashed.

As a famous Indian guru once observed, some people try to be tall by cutting off the heads of others.

Contrast that with the views that are expressed when they come from people with the expertise and experience to understand what negative gearing is, how it works and what the consequences would be if it was removed.

A recent poll of such people found that the disadvantages would outweigh the advantages.

Before delving into the comments of experts who have been interviewed by news media about this recently, let me remind everyone that Australia DID end negative gearing in the 1980s and within two years the same Federal Labor Government that scrapped it, did a major backflip and reinstated it.

Why? Because it caused a serious shortage of rental properties and higher rents. And it didn’t bring down property prices or improve housing affordability.

Let me also remind you that more recently New Zealand put an end of negative gearing tax benefits and right now that nation’s government is reinstating it – because, as happened in Australia in the 1980s, the upshot was a rental shortage and higher rents.

In the light of those precedents, you have to wonder why we’re having this debate at all.

Now, returning to a recent survey of so-called experts polled by the Australian Financial Review – the majority view, arising from that survey, was that the consequences of changing tax arrangements for property investment are likely to include higher rents.

Why? Because investors would exit the housing market, causing a further drop in supply of rental homes at a time when Australia has the lowest vacancy rates ever recorded.

Analysts polled in the quarterly Australian Financial Review property survey, overall, painted a “BE CAREFUL WHAT YOU WISH FOR” scenario amid a national debate over the merits of changes to negative gearing and capital gains tax – which is usually described by media, inaccurately and unfairly, as a CONCESSION.

Those polls said any benefit to first home buyers from any price falls – which are hypothetical and not based on any precedent or research - as investors exit the market would be modest, potentially short-term and effectively traded off against a consequent squeeze in supply.

Here’s one prediction from a respondent to the survey:

He says: “By lowering the after-tax return to investors, any move to wind back the negative gearing benefit and increase capital gains tax would lead to a fall in investor demand for housing and a short-term fall in prices, say of 3-4 per cent.” 

However, those comments from Australia’s worst forecaster of residential property outcomes, AMP chief economist Shane Oliver – so the forecast that property prices would fall is somewhat dubious. That certainly didn’t happen in Australia in the 1980s or in New Zealand after they, more recently, ended negative gearing.

In any case, Oliver goes on to say: “However, this (slight fall in prices) is likely to be short-lived as less investor participation in the property market would ultimately lead to a lower supply of new homes to the property market, higher rents and then a blowback to higher prices.

“It will do nothing to fix the basic problem which is a chronic undersupply of housing relative to population-driven demand.”

That much he got right.

Proptrack’s executive manager for economic research, Cameron Kusher, said the removal of negative gearing and increasing capital gains tax might marginally reduce house prices, but consequent discouragement to investment would reduce supply.

He said” “It’s important to look at the taxation system holistically rather than in a vacuum, especially whilst the rental market remains challenged.”

In other words, there would be more disadvantages than advantages.

Barrenjoey’s chief economist Jo Masters warned of the “unintended consequences” of modifying the current settings.

She said: “Negative gearing and capital gains tax reform alone are not a silver bullet and need to be debated both in the context of broad tax reform, and the other levers available to the housing sector, including supply.”

Nicola Powell, Domain’s chief of research and economics, said that it was “a common misconception” that the negative gearing and CGT provisions were “primarily enjoyed” by wealthy, older Australians. 

Powell said most investors own just one property, and a larger share of them are under 50.

She said: “If negative gearing were removed or scaled back, younger, more financially vulnerable investors – especially those with just a single property – would be the first to feel the impact, potentially leading them to sell. Meanwhile, wealthier investors, who are more likely to be positively geared, have greater financial flexibility and would be less affected.”

Like other respondents, Jarden analyst Lou Pirenc says any benefit from the departure of some investors from the market it would come at a cost.

He said: “Longer term, growth to new housing supply could be further weakened with less incentives for investors to enter the market, especially as the cost of owning an investment property currently remains unattractive.

“This,” he said, “could potentially see house prices RISE longer term as the imbalance between demand and supply exacerbates.”

Indeed. So the consensus among those commentators is that removing negative gearing tax benefits and increasing capital gains tax would not provide any long-term improvement in housing affordability but would reduce the supply of housing, particularly rental homes, and PUT FURTHER UPWARD PRESSURE ON RENTS.

But try telling that to the Greens, whose draconian anti-real estate policies were a primary reason they were the big losers in the Queensland state election at the weekend.