Negative gearing debate pipes more Er-gas


By Gavin Putland

Labor must stop denying negative gearing truth” screams the headline over Henry Ergas’s latest column in the Australian, which begins by quoting Hannah Arendt’s dictum that “no one has ever counted truthfulness among the political virtues”. That would seem to mean not even Henry, and indeed it’s not hard to identify the element of truth that has gone missing from his analysis: the word supply does not appear anywhere in the article!

“[A]lthough house prices will fall,” says Henry, “rents must rise, as some of the increased costs of owning rental properties are passed on to tenants.”

Well, the main determinant of the cost of owning a rental property is the purchase price. If that falls, then, according to Henry’s logic, so should rents.

Meanwhile in the real world, any “increased costs of owning rental properties” will give landlords the desire to raise rents, but will not give them the ability to raise rents unless it also reduces the supply of, or raises the demand for, rental accommodation. And the whole point of Labor’s policy on negative gearing — namely limiting it to new homes while grandfathering past investments — is to raise the supply of rental accommodation (not even Henry is pretending that it will raise demand). Even the increase in capital-gains tax (CGT), or the threatened reduction in resale prices, favours supply when we remember that it is the land, not the house, that yields the “capital gain”. Reducing after-tax “capital gains” will not cause the land to flee to the Cayman Islands. What it will do, by default, is make current income more attractive relative to capital gains, and thereby incentivise land owners to generate current income from their land — e.g. by building houses on it!


And what are these “increased costs” anyway? The increase in CGT applies only to future investors. The disallowance of negative gearing applies only to future investors, and only if they defy the new incentives by buying established homes instead of new homes. All presently held investment homes are exempt — unless Henry wants us to believe that a reduced prospective resale price is a “cost” to be passed on to current tenants, while the saving for the next buyer is not a cost reduction to be passed on to future tenants!

Henry goes on to cite modelling which found that higher taxes on investor-owned property would shrink the rental market. Nowhere does he say whether the modelling accounts for exempting new construction from the tax increases. I guess it doesn’t.

Then he blames the disallowance of negative gearing in the USA in 1986 for raising rents. Nowhere does he say whether negative gearing continued to be claimable on new construction. I guess it didn’t.


He further complains, quoting Edward McCaffery, that in the USA, “tax shelters for wage earners were shut down or drastically curtailed”, while bigger investors could still offset rental losses against other investment income. He conveniently doesn’t acknowledge that under Labor’s plan, small investors can still negatively gear by investing in new homes, while the CGT changes will affect small and big investors alike.

Stop it, Henry — you’re making me look like a rusted-on Labor supporter! Actually there’s plenty to dislike about Labor’s plan. For one thing, while it increases the incentive to build, it does little to encourage the present owners of all those empty downtown apartments to make them available for rent. For another, as the States are primarily responsible for infrastructure, it would be better for any increase in CGT to occur at State level so that the uplifts in land values due to infrastructure can be recycled to amortize the capital cost. But if you want to score any points for your beloved Tories, Henry, you’ll have to do better than this.

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.