SQM Research last week released questionable analysis of Labor’s negative gearing policy (debunked here), which received widespread mainstream media attention and was greeted with headlines warning that dwelling values would plummet and rents would skyrocket under Labor’s policy.
The most questionable aspect of SQM’s analysis was its rewriting of history about the impact on rents when Labor temporarily abolished negative gearing between 1985 and 1987. According to SQM, the abolition of negative gearing sent rents surging:
According the Australian Bureau of Statistics Consumer Price Index Table Sydney rents rose by 31.9%, Melbourne rose by 22.9%. Perth rose the most by 33.5%. In all, five of the eight capital cities rose by more than the CPI increases over the period Negative Gearing was repealed.
Additional evidence from the Real Estate Institute of Australia (REIA) suggests that rents for houses recorded rampant increases over the period. The REIA records that rents for 3-bedroom houses in Sydney, rose by 43% over the period June 1985 to September 1987…
The large declines in commencements reduced new supply relative to underlying demand. This would have directly attributed to the large rises in rents over the same period…
As I noted in my critique, there is absolutely no evidence that the abolition of negative gearing in the 1980s had any discernible impact on rents. According to the ABS’ rent data, real inflation-adjusted rental growth only rose in Sydney and Perth (where vacancy rates were already low), whereas rental growth was flat or fell elsewhere. There was also no impact nationally, with rental growth much higher both before and after the change (the period where negative gearing was abolished is shown in red below):
In response to my critique, SQM Managing Director, Louis Christopher, wrote the following in the comments section, which led to the subsequent rebuttal from me followed by a counter-rebuttal:
Black Dragon (Louis Christopher):
The charts on the rents we published are real. The main chart from the ABS CPI index and that index clearly illustrates rents for the majority of cities rose above CPI increases at the time. Further, rental rises were lower in the lead up to ’85 and were rising at a decelerated rate between late ’87 to ’89. Why omit these points? Because it is an inconvenient truth for you, Leith? Come on, man. Fair debate here please…
Unconventional Economist (me):
“The charts on the rents we published are real. The main chart from the ABS CPI index and that index clearly illustrates rents for the majority of cities rose above CPI increases at the time”.
So what? My charts are also real and show that the growth in real rents only rose in Sydney and Perth. Also, it was below that both before and after the negative gearing change. Your REIA chart also shows that real rents fell across three capitals.
Surely if negative gearing caused rents to rise, then wouldn’t rental growth have risen across Australia, not just in Sydney and Perth? Pretty basic stuff. You’ve tried to find a negative gearing ‘smoking gun’ when there isn’t one.
“Further, rental rises were lower in the lead up to ’85 and were rising at a decelerated rate between late ’87 to ’89. Why omit these points? Because it is an inconvenient truth for you, Leith? Come on, man. Fair debate here please”.
My charts prove you wrong here. I’ve used the very same ABS CPI/Rent data as you. Take a look. There was absolutely nothing exceptional about this period.
Black Dragon (Louis Christopher):
Yes, it is basic stuff which you don’t want to state. The rent rises back in the 80s clearly record that rents rose above CPI in the majority of cities, Leith. Indeed rents were rising at a slower pace before and after the negative gearing repeal period. That is according to the ABS. Those are the facts.
Have you considered that the acceleration in rents was actually fueling inflation at the time? Certainly rents are a large composition of the CPI basket.
Rather than posting all the same evidence from last week’s dissection, here’s separate analysis of rental data in the 1980s which also debunks SQM’s claims.
First, here’s independent economist Saul Eslake:
Supporters of ‘negative gearing’ argue that its abolition would lead to a ‘landlord’s strike’, driving up rents and exacerbating the existing shortage of affordable rental housing. They repeatedly point to what they allege happened when the Hawke Government abolished negative gearing (only for property investment) in 1986 – that it ‘led’ (so they say) to a surge in rents, which prompted the reintroduction of ‘negative gearing’ in 1988.
This assertion is actually not true. If the abolition of ‘negative gearing’ had led to a ‘landlord’s strike’, as proponents of ‘negative gearing’ repeatedly assert, then rents should have risen everywhere (since ‘negative gearing’ had been available everywhere). In fact, rents (as measured in the consumer price index) only rose rapidly (at double-digit rates) in Sydney and Perth – and that was because in those two cities, rental vacancy rates were unusually low (in Sydney’s case, barely above 1%) before negative gearing was abolished. In other State capitals (where vacancy rates were higher), growth in rentals was either unchanged or, in Melbourne, actually slowed (see Chart 9).
Here’s the Grattan Institute:
The potential effects of tax changes on rents are perhaps the most contentious. Concerns persist that limiting negative gearing or reducing the capital gains tax discount will reduce the supply of rental properties and push up rents.
To some extent these claims are based on experiences from the 1980s, particularly in Sydney. In 1985, the Hawke Government restricted negative gearing so that rental losses could not be used to reduce tax payable on other income streams.106 Rents rose rapidly in Perth and somewhat in Sydney. Two years later, the policy was abolished out of concern for increasing rental prices.
History might have taught a different lesson if fewer of Australia’s Prime Ministers and Treasurers came from Sydney. Although the tax changes were nation-wide, inflation-adjusted rents were stable in Melbourne and actually fell in Adelaide and Brisbane (Figure 14). In Sydney and Perth, rent rises were in fact driven not by tax changes but by population growth and insufficient residential construction – due to high borrowing rates and competition from the stock market for funds.
Here’s ABC Fact Check:
Over the period when negative gearing was abolished only Sydney and Perth experienced strong growth in real rental prices.
Real rents in Adelaide and Brisbane fell considerably over the period, whilst Melbourne experienced low, or at times no, real growth in rents.
Heck, even in the heavily redacted Treasury advice to the Turnbull Government on the likely effects Labors negative gearing and CGT policies, Treasury noted that “previous changes to negative gearing (1985-87) and the introduction of the capital gains tax discount had little discernible impact on the [housing] market”.
All of this is academic, of course, since Labor’s current policy – which grandfathers existing landlords and maintains negative gearing for new builds – is completely different to the outright negative gearing ban between 1985 and 1987.
Nevertheless, SQM has attempted to find a rents ‘smoking gun’ where one doesn’t exist. And our brain dead mainstream media largely swallowed its argument hook, line and sinker.