Joe Hockey flat out lies on negative gearing

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By Leith van Onselen

Despite being schooled last month on Q&A by the Grattan Institute’s John Daley, Treasurer Joe Hockey has once again come out in defense of negative gearing, repeating the lie that rents would increase significantly if negative gearing was unwound. From The AFR:

“If you change negative gearing then there are significant flow-on consequences from people that rent homes and that needs to be properly considered”…

“A lot of Australians have invested their hard earned money in real estate, and in doing so, they have offset the losses of that real estate against their primary income, in order to give themselves and their children some financial security”.

“At the same time, there is a very strong argument that if you were to abolish negative gearing, you would see a significant increase in rents.”

Let’s once again show why Joe Hockey is dead wrong and rents would not rise in the event that negative gearing was restricted (or abolished).

First, the evidence shows overwhelmingly that negative gearing does little to boost housing supply, with investors piling into established homes rather than new construction (see below charts).

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Therefore, in the event that negative gearing was once again quarantined so that losses could no longer be claimed against wage or salary income (as occurred between 1985 and 1987) and a proportion of investment properties were sold, who does Hockey think they would sell to? That’s right, renters (or other investors). In turn, those renters would be turned into owner-occupiers, thereby reducing the demand for rental properties, leaving the rental supply-demand balance (and rents) unchanged.

And guess what? This is exactly what happened between 1985 and 1987 when negative gearing was temporarily restricted by the Hawke/Keating Government. Rental growth between this period (shown in red) did not rise nationally, with periods of higher rental growth recorded both prior and subsequently:

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What about at the individual capital city level? Sure, there was stronger growth in Sydney:

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And Perth:

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However, this was due to the fact that rental vacancy rates were very low at the time in these two cities – as shown in the 1987 Cabinet Submission on negative gearing (see below table) – not because of negative gearing’s temporary ‘abolition’.

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In the other capital cities, where vacancy rates were higher, there was zero impact on rents, which even fell in some jurisdictions (see below charts).

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Indeed, the 1987 Cabinet Submission on negative gearing noted this exact phenomenon:

“Data for individual capital cities suggest that, as might be expected, rents have risen more rapidly in those cities where vacancy rates have been tightest. In the twelve months to March quarter 1987, rent increases in six of the eight capitals lagged the CPI“.

Now, if there was any truth whatsoever in Hockey’s claim that there would be a “significant increase in rents”, then wouldn’t rents have risen Australia-wide, rather than in only Sydney and Perth?

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Blind Freddy can see that negative gearing does nothing to improve rental affordability or availability, precisely because it does nothing to boost housing supply. In effect, all it is doing is using taxpayer subsidies to push-up house prices (see next chart) and turn would-be home owners into renters – hardly a desirable outcome from a budgetary or social perspective.

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All of which makes Hockey’s claim that negative gearing gives ordinary Australians and their children “some financial security” more galling. What about the financial security of young Australians who are being locked-out of the housing market due to the orgy of investor participation (see next chart), or are being forced to pay-off some of the world’s biggest mortgages, in part due to negative gearing? Do these people not matter?

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If negative gearing was unwound, there would be less pressure on house prices and younger Australians would not need to devote as much of their lifetime’s earnings to pay-off a home.

Home ownership rates, which have collapsed, would also be higher, particularly amongst younger cohorts:

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Abolishing negative gearing is a policy no-brainer which, sadly, Hockey seems intent to defend despite the overwhelming evidence that negative gearing is doing harm.

I guess this is what you get when you own multiple investment properties – unadulterated self-interest with little regard for the common good.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.