The Oz promotes negative gearing lies

By Leith van Onselen

If you want a prime example of why the mainstream media is rotten to the core, look no further than the below editorial published by The Australian late last week [my emphasis]:

A broader GST base also would preclude the need to scrap negative gearing on investment property. Tax deductions for interest and other business costs encourage investment. Real estate investment should not be treated any differently. In 1985, Labor abolished negative gearing for future rental property investors but restored it just two years later after investment fell and rents soared.

Seriously, how many more times must the myths surrounding negative gearing be busted before commentators take note?

The Australian’s claim that housing investment fell following negative gearing’s quarantining between 1985 and 1987 is plain wrong.

The below chart illustrates clearly that genuine investment – i.e. investment in new dwelling construction rather than the transfer of ownership of established dwellings – fell sharply after negative gearing was reinstated in 1987:

ScreenHunter_10225 Nov. 10 09.02

Such that over 90% of property investors now purchase established homes, rather than adding to housing supply:

ScreenHunter_10224 Nov. 10 09.02 ScreenHunter_10226 Nov. 10 09.05

The Australian’s claim that “rents soared” when negative gearing was quarantined between 1985 and 1987 also does not pass scrutiny. The below charts track the change in real (inflation-adjusted) rents across all major markets, with the period where negative gearing was “abolished” shown in red.

Rental growth remained either flat or fell nationally:

ScreenHunter_3791 Aug. 15 11.02

In Melbourne:

ScreenHunter_3799 Aug. 15 11.12

In Brisbane:

ScreenHunter_3800 Aug. 15 11.12

In Adelaide:

ScreenHunter_3801 Aug. 15 11.12

In Hobart:

ScreenHunter_3803 Aug. 15 11.15

In Canberra:

ScreenHunter_3804 Aug. 15 11.15

And in Darwin:

ScreenHunter_3805 Aug. 15 11.16

With only Sydney and Perth registering increases, due to very low vacancy rates at the time:

ScreenHunter_3798 Aug. 15 11.12
ScreenHunter_3802 Aug. 15 11.14

Surely, if negative gearing had any impact on the cost of renting, its abolition in 1985 would have caused rents nationally to explode? Yet, the evidence shows absolutely no impact.

The Australian clearly favours ideology over evidenced-based policy debate.

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Comments

    • A negative profit business which is used to negative gear profitable businesses, deciding to support negative gearing? I’d like to register as displaying no surprise at all.

    • News Limited holds 61% REA Group shares, and Fairfax media has Domain, both Fairfax and News need to protect their business interests at any costs.

  1. I like the OZ, but they are dead wrong

    they are probably pandering to their mostly boomer readers, eg Judith sloan writing her crap

    • Any theories on why Keating re-instated negative gearing then? Presumably if the impact on rents from it’s removal was downwards, it would have been a curious political move.

      • Yep, and if the indicators showed that the impact on the poor was either flat or positive, why did he reinstate it – to ingratiate himself with liberal voters?

  2. FiftiesFibroShack

    Hit the poor with an increase to the GST so the middle class and wealthy can keep negative gearing. Have we reached peak Oz yet? Perhaps we could also raise the price of education, that way we can keep all the juicy super concessions!

  3. So we should raise GST and focus pain on the less well off, in order to avoid pain for the more well-off?

    • Here – let me fix that last part for you:

      … in order to avoid pain for from the more well-off?

      There, isn’t that better now?

  4. It’s more cost efficient for media to cut and paste known “facts” that everyone with self interest agrees to rather than do expensive and potentially disagreeable investigation.

  5. The mistake that most people make is that they assume that the Australian is a news media outlet.

    Wrong.

    It is part of an entertainment empire which targets particular demographics (Pixar for kids, The Australian for retired white guys and travelling salesmen, yes ‘men’), it then tells the the stories those demographics want to hear…for money.

    Pixar, Disney, Fox News, and The Australian are all part of an entertainment empire, and one should not take anything written by the Oz any more seriously than something said by a character from Toy Story. As this article has demonstrated.

    • “…for money.”

      Not The Oz – it loses tens of millions per year. It’s a Murdoch vanity and influence charity case.

      • I chose the word “money” rather than “profit” specifically.

        The reason being that I didn’t want to get into the area of socio-political influence as part of the return, which, while interesting is somewhat off topic.

        However, Disney in his cartoon about the grasshopper and the ants as an exemplar of attacks on those of his staff who dared ask for more money, shows that as entertainment there’s also a non-monetary payoff. I just didn’t want to go there.

      • Yes. In addition to non monetary payoff for Rupert, there is also significant monetary payoff for Rupert from his ownership of the Oz that still goes into his pocket but not through the Oz’s bottom line. The Oz may not be a charity, but I still think it could be called a “not for profit” enterprise…

    • It reminds me the other day of the horrified herds from a parasite in Australian drinking water eating “Brain Cells”. As if Australian have any for the water borne parasite to feed of 🙂 . Don’t worry about it guys the parasite will starve to death.

    • or if you repeat it often enough, eventually people will believe it. Straight out of the Nazi textbook on propaganda.

  6. Problem with the data, is that it also coincides with the era when the supply of land for housing growth was inverting from its decades-long norm of “elastic”, to “inelastic”. Due to new ideologies prevailing in the regulatory agencies.

    Negative gearing does in fact provide the benefit that its defenders claim, WHEN “land for housing supply” is elastic.

    The fact that none of them are pointing this out, means that either they are among the 90% + of people who do not “get” land supply in the overall urban-economics picture, or they really are as evil as MB accuses. I am quite prepared to believe that there are some powerful geniuses out there who understand only too well, the toxicity of many demand-side measures when combined with urban growth boundaries – which is why urban growth boundaries are the number one sacred cow. NG and immigration and demand side subsidies are nowhere near as sacred as the growth boundaries.

    Analysts who condemn everything but the growth boundaries are all useful idiots; those who condemn everything including factors which COULD be beneficial, just need to learn a bit more, including from the historical evidence and the global evidence. Germany has more extreme “subsidies” of rental housing than just NG, but they don’t have an insane bubble. In fact their subsidies and incentives to the provision of rental stock, work exactly as they should. Get rental housing supplied and rents kept lower, and home ownership has not become a fetish.

    And Germany is almost unique among developed nations as a genuine “added value export driven” economy, with investment largely directed accordingly.

    • “Investment in housing” in Germany, actually means at the end of the day, “providing what the labour force needs”. Not much more than that. Without the NG and other incentives, both landlording and renting would probably not be so attractive, including relative to the full range of opportunities in actual productive stuff.

    • Phil, even if supply was perfectly elastic, NG would still promote higher than otherwise prices because it lowers the after tax cost of capital and drives down rental yields from wherever they would be otherwise.

      Re. Germany, I could be wrong, but I thought the subsidies went to tenants not landlords? If so this has a very different effect on prices.

      • When supply is elastic, the price will be “whatever suppliers in competition with each other can bring product to market for”.

        There are very definitely cross-subsidies to the Landlord class in Germany, partly to attract investment in the face of the existence of rent controls. Then rents are kept artificially low, renting is an artificially attractive option, and house prices are lower than otherwise.

        Without a beneficial combination of policies including elastic supply of land for housing, subsidies to renters would serve to drive prices up; I don’t know why you might think otherwise.

  7. “A broader GST base also would preclude the need to scrap negative gearing on investment property”

    should be read as

    ‘A broader GST base also would preclude the need to scrap negative gearing on MY CURRENT AND FUTURE investment property’

    I think you will find a lot of politicians agreeing with them.

    Unfortunately the problem is most Australians don’t understand the investment opportunities (read jobs) that Australia is destroying by keeping residential real estate as such a protected and preferential asset class.

  8. Leith, do you have rental vacancy data that also goes back to ~1973?

    It would make an interesting overlay with the price data you have, particularly in the periods where NG changes are concerned.

    My 2c

  9. Tax should be on the unavoidable, consumption, and the immutable, land.

    Tax on the ephemeral, income, causes all sorts of tax avoidance to occur.

    Tax at origination and destination. Anything inbetween creates complexity and the opportunity for obfuscation.

  10. Poor old Rupert can barely give his papers away these days. But persist he will, because Rupert’s primary concern here is selling the national agenda. That’s not the kind of power anyone gives up lightly. This economy runs on bullshit, it needs institutional supporters like Murdoch to keep it running.

  11. GST needs to be 20 or 25% on soft drinks, fast-food, alcohol and cigarettes so our hospitals can ever so slowly move toward some sort of a user-pays system…

    keep fresh food and healthy stuff exempt

    Get our people healthy and reduce the strain on our public health system all in one. its not rocket science

  12. I would say that even broader GST (say 40%) than Oz was suggesting could even allow to scrap Stamp Duty fee on investment property, though of course Stamp Duty should still remain at the same level for owner occupiers. After all investment in property should be treated equally as any other investment and there is no such high stamp duty on investing in other businesses, right The Australian?

    See, I could cope with this NG topic even better than Hockey did. Wanna NG to be removed? Stop asking for that or we increase CGT discount!!! Best defence is a good offence

      • Whatever. Broad and increase please! Squeeze everything from non-investors and give it all to investors, these unsung heroes that keep our economy thriving and try to provide as affordable accommodation as possible for our society.

        Or is it too sweet?