After conducting a statewide survey of its 14,000 members, the Real Estate Institute of Queensland (REIQ) has argued that changing negative gearing would have a “crippling effect” on Queensland’s property market by lowering dwelling values while magically raising rents. From The AFR:
“We now know for a fact that 79 per cent of respondents will get out of property and find an alternative investment strategy that works more effectively and yields a better return,” Mr Honeycombe said.
“That will have a crippling effect on house values and on the rental market, where the private rental market plays such a critical role in keeping rents affordable”…
Mr Honeycombe said that would represent around $130 billion in value, deleted instantly based on CoreLogic estimates that residential real estate in Australia is valued at about $6 trillion.
“The impact of this on the broader economy would be far-reaching.”
Let’s evaluate Mr Honeycombe’s key points.
First, why would housing investors rush for the exits when Labor’s negative gearing policy grandfathers negative gearing for existing investors and would only affect new investors in existing dwellings from 1 July 2017? Surely the vast majority of investors would remain in the housing market and retain their negative gearing benefits, especially if rents were to also rise, as argued by the REIQ, which would make their investments even more profitable?
Second, the so-called $130 billion loss of value for the residential housing stock sounds like a lot but represents a price fall of only 2.2% – hardly significant and hardly “a crippling effect on house values“, particulary in light of the massive capital growth that investors have enjoyed.
Finally, why would Labor’s policy cripple the rental market? The ABS data clearly shows that 93% of property investors purchase existing dwellings rather than new construction, so they are merely substituting homes for sale into homes for let (see next chart).
Under Labor’s policy there would indeed be less “investment” (read transfer of ownership) in existing dwellings, but those homes would not magically disappear from the supply-demand equation. Rather, those homes would be purchased by an owner-occupier, thus reducing demand for rental properties by the same proportion as the fall in rental supply.
More importantly, because Labor’s policy would channel negative gearing towards new builds, dwelling construction would increase, as will the supply of rental accommodation. And this extra supply would lower rents, other things equal.
It is also worth pointing out that Labor’s ‘new homes only’ negative gearing policy is entirely consistent with the state government’s changes to first home buyers’ grants, which were shifted to newly constructed homes several years ago in order to boost supply. It is also consistent with the Coalition’s rules on foreign investment, which bans investment in existing dwellings in a bid to channel investment into new builds and boost rental supply and economic activity.
So, the REIQ’s claim that Labor’s policy would choke rental supply and force-up rents clearly does not pass scrutiny. If anything, the outcome would be the opposite: increased dwelling supply and lower rents.
Like the Turnbull Government, the REIQ has chosen to run a scare campaign in a bid to scare voters away from voting Labor and to line the pockets of its members. In the process, it has completely abandoned common sense.
