The negative gearing ‘whack-a-mole’ continues into 2016.
The Australian Chamber of Commerce and Industry (ACCI) has claimed that unwinding negative gearing could result in higher rents, and deteriorating housing affordability. From The SMH:
“Investors require a return on their investment and the return is considered on an after tax basis,” the ACCI submission says.
“A higher tax burden would require a higher pre-tax return. In a situation where there is a relatively tight rental market, as is the case in most capital cities, there is a substantial risk that investors would simply offset the increased tax burden with higher rents.”
Clearly, the ACCI is not familiar with the ABS’ housing finance data, which shows that nearly 95% of property investors are buying established dwellings, thus they are not adding to housing supply and are merely substituting homes for sale into homes for let:
Hence, negative gearing is not lowering rents, but merely helping to push-up home prices. And this increased demand from investors is clearly crowding-out first home buyers:
Let’s also look at the logic of the ACCI’s statement. It seems to believe that property investors can somehow control rental prices, and that they would simply collude to drive up rents in the event that their after-tax return was reduced. What complete and utter bunk.
Investors charge the maximum rent that the market will bare, based on supply and demand. And if the supply of physical dwellings is not affected by negative gearing (see first chart above), then rents will not somehow magically increase. Instead, the “higher pre-tax return” would be achieved via a reduction in house prices increasing rental yields (not rents), as investor demand falls.
ACCI’s claim that “there is a relatively tight rental market” is also highly questionable, given rental growth is at a record low currently, increasing by just 0.3% in 2015 (i.e. negative after inflation), according to RP Data.
What is also disappointing about the ACCI’s position is that it fails to comprehend that the negative gearing rules are bad for industry and the economy in the longer-term.
That is, channeling capital into unproductive housing necessarily starves the productive economy of funding, whilst pushing up land costs, which also chokes-out the productive economy.
Talk about kicking an own-goal by supporting a policy that is actually detrimental to the ACCI’s own constituency.
