What really happened to rents when negative gearing was abolished?

By Leith van Onselen

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 In all, five of the eight capital cities rose by more than the CPI increases over the period Negative Gearing was repealed.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.

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Comments

  1. When we head into recession this year and have the housing bust over the next 3/4 years, and half of Melb and Syd are in negative equity, people move in together for financial reasons and the empty homes bought by Chinese receive huge increase in vancacy taxes, the elderly wealthy who move to their 2nd coastal country home, there won’t be a rental problem in Melb, changes in negative equity won’t have any effect and also you need a job to claim the tax deduction

  2. – I agree with SQM that abolishing Negative Gearing (NG) will push property prices lower because it will increase costs for the landlords. And A LOT OF “investors” are already stretched right now and abolishing NG will push property prices even lower. I that regard I am – more and more – convinced that the Liberals have a good/better prospect of winning the next state and national elections than people currently think.
    – I am convinced that rents will drop more as investors are becoming more desparate to get an income from their property.

  3. I find this piece of yours in itself misleading, Leith. It is also possibly defamatory as with your previous posts on my company. It’s about time macro business is held to account.

    • How is it defamatory, Louis? You have presented data regarding rents that is clearly wrong – as revealed above by me and various other diverse sources.

      The most disappointing thing in all this is that the MSM posted your ‘findings’ as if they were the truth, largely without question.

      Moreover, how is my post “misleading”? You claimed that NG drove up rents in the 1980s when it clearly didn’t.

      You can’t expect to produce research like this, have it plastered across the MSM, and have it go unchallenged.

      • Tom ConleyMEMBER

        The property spruikers seems to be very sensitive about analysis that challenges their debatable research … the word that matters here is “debatable” … nothing like throwing in a cowardly “possibly defamatory” …

    • “It is also possibly defamatory as with your previous posts on my company…”

      I suggest that this is ‘possibly’ inane for someone operating as a commercial entity, who makes a living by injecting ‘expert analysis’ into public domain media, to imply that they are defamed if their analysis is found wanting. It’s not as if the economic soothsaying profession has covered itself in glory. Or are you suggesting that people can litigate if they incur loss from relying upon your infallible advice? Seems only fair.

    • ChristopherJMEMBER

      No, mate. I think you will find that thinking people will come down on the side of Leith. There is no way you can suggest the 2 year change in the 80s had any affect on rents. Just suits your agenda

    • You better have a word with Saul, The Grattan Institute, The Treasury and the ABC as well. They’re all defaming you with their charts and words..

    • DefinitelyNotTheHorribleScottMorrisonPM

      I support the Black Dragon. Rents are sky high in all other countries in the World because they haven’t yet discovered the uniquely Australian joy of negative gearing. It allows Aussie landlords to altruistically give generous discounts on rents to peasants.

      • When I tell people I know from overseas first world countries how much rent is for a week in Shitney they keep repeating you mean monthly don’t you. I say no it’s per week. They are dumbfounded. 😲

      • LOL, seriously. When I tell people in America that I rent a studio for $600 per week, they assume I mean per month. When I explain I don’t, I typically get, “Wow, that’s more than double my mortgage payment for my HOUSE!”.

    • Just throw out the word defamatory without specifying how. Trying to scare people away now, Mr Dragon?

  4. The ALP could really slam this non-issue by leaving the CGT discount on new construction at 50%.

    That would end all of the arguments and moaning about the proposed changes stopping new construction (with an increased tax) and thereby ‘driving up rents’.

    If we find that our capital cities end up with vacancy rates of more than 5% for more than 5-10 years (about how long it will take to drive some sense into Australians about over investment in existing housing) we can always wind down the 50% discount on new construction to 25%.

    The ALP would be sensible to put this old nag of a debate out of its misery and send it to the glue factory.

    Until there is a commitment to slow population growth (and there is no sign of that) there is no alternative but to build baby build as much new housing as possible.

    • ChristopherJMEMBER

      I see a lot of rental stock has been converted into private hotels. If I want to open a licensed bed and breakfast and get all the appropriate insurances, I need a commercial grade kitchen, food safety training and licensing, fire safety procedures and so on. If I just advertise on airbnb, the same regulators turn a blind eye as to how I do it.
      This has impacted vacancy rates and rents enormously and I don’t know how much longer the hotel industry is going to put up with it. Or is it something that our governments are going to continue to ignore?

      • Yes, the rise of AirBnB (and the many similar types of services) has really changed the market for accommodation and it is likely to be a permanent change.

        While private hotels of the type you describe probably do require more regulation, and they will probably get it eventually as the hotel/motel industry starts to howl, it is doubtful that it will turn back the clock.

        The reality is that there has been a permanent increase in the demand for more informal forms of short term accommodation, mostly from all those people who cannot afford to stay in hotels/motels etc (or just don’t like hotels and motels), and that means we need to build more housing to address that increase in demand. The sooner we do so the better.

        I am sceptical about the merits of regulation designed to stop short term letting while there is excess demand (very low vacancy rates) because what is most likely going to happen is that the demand for low cost short term / informal accommodation will end up being permanently suppressed.

        Providing we are not running a population ponzi program (which is another story) it should not take long to approve and build enough housing to achieve a vacancy rate of 5%+ even with things like Air BnB thriving. Perth has Air BnB and it has had vacancy rates 5% or more for over 5 years – with benefits to home buyers and renters alike.

      • This is not rocket science.

        Have population of 30 million you divide by 3 and need 10 million houses.
        People getting older and living alone – add 2 million houses
        People getting richer and buying holiday homes – add another million
        Allow rich Chinese to buy and leave empty – add 5 million more
        Allow AirBNB – add a few more million

        And rather than try to figure out the exact numbers of dwelling needed, just look at the price.

        Price low and affordable to all = ABUNDANCE
        Price high and unaffordable to ordinary people = SHORTAGE

      • The Claw,

        I agree but for something that is not rocket science it seems to cause a lot of people a lot of difficulty wrapping their heads around it.

        Just look at Perth.

        There we have a market dripping in super cheap credit (like the rest of Australia) and vacancy rates hanging around 5% for about 5 years (they even got higher than that for a while).

        The result was house prices drifting downwards and rents drifting downward as well.

        The conclusion should have been obvious.

        A vacancy rate of at least 5% is powerful medicine for a sick and over priced housing market. Even when the RBA has driven rate into the ground and finance brokers (and their clients) are fibbing on loan applications.

        But instead we get a bunch of complicated theories, the single gun theory “credit” and how we can “produce” affordable housing while vacancy rates remain super tight.

        A vacancy rate of 4% would be a simple and highly effective target for public policy.

      • ChristopherJMEMBER

        Thank you 007 and the claw. Certainly changed the short term rental market. Not nice when you live next to a house that’s constantly being overtaken by loud tourists. Not me, I’d move

      • ChristopherJ,

        That sounds very much like the long term leased semi-permanent backpacker /uni rentals of pre Air BnB era where a revolving door of new flat mates provides endless excuses for welcomes, farewells etc.

        I always had sympathy for the neighbours.

        No body corporate just a landlord collecting the rent….in cash.

        Even if there is a body corporate and the body corporate passes a by-law banning short term rentals that would not solve the problem of long term rentals with short term house mates……or even just young people doing young people stuff like noisy etchings.

        Fortunately a solution seems to be on the horizon.

        Air BnB is now getting into development so the entire block is AirBnB. High Rise Harry is probably thinking along the same lines. Sell the units in his serviced apartments and run the letting service for a nice margin.

        More accommodation options and perhaps less interest from the mom and pop fly by nighters.

        Contrary to the scare stories most Air BnB guests are really quiet and boring.

        In part because they don’t want a bad score /review.

      • Yup, I’m the infamous person who is the last permanent renter left standing in a 12-unit unlicensed hotel. I’m figuring it’s only a matter of time before I get turfed out.

      • ChristopherJMEMBER

        Thank you 007.
        Hobbit, that can’t be nice. But then the vibrancy for you, eh?

  5. Rents are a function of wages, not house transaction prices nor land holder aspirations. Leith is correct. The MSM want to broadcast SQM’s message and find it easy to say ‘Louis Christopher said…’

    The propensity to consume housing is a lot more flexible and fungible than many realise. No-one likes shared housing but they will do it.

    Don’t Buy Now!

    • Wages are one factor definitely but in a housing shortage situation wages don’t have to go up for rents to rise. The bottom rung just misses out and people on the next wage band have to settle for “less property”. i.e. The capacity to service rent stays the same; what they get for their money changes. Although given the apartment boom caused by the housing price boom whether we are in a shortage anymore is up for debate. I suspect we aren’t at least for the next few years.

  6. “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.”

    Is the data available to check this?

    • I think Paul Keating decided the right thing to do was to remove rents from the CPI and replace it with the price of a laptop computer with 386 processor chip (oh AND reinstate negative gearing to please his fan club).

      Just out of interest if you find some old newspapers on the Internet (or in some old library I suppose) you can read advertisements and find the price of a lawn mower is about 3 times the weekly rent for a house in Sydney. Now the weekly rent is 3 times the price of a lawn mower. The mower is now super affordable, but a house with a yard to mow is completely unaffordable to most workers.

      • DefinitelyNotTheHorribleScottMorrisonPM

        They should count themselves lucky. Having lawns means having to deal with blue collar gardener types. I let them drink out of the hose when the dogs aren’t using it.

  7. Is there any data as to the vacancy rates at the time of each of the capital cities from that far back as compared to today? I ask because I think that’s definitely a big factor as to whether removing negative gearing/CGT will eventually cause rent rises or not. I note the current subsidies to investors have probably fueled the apartment boom a lot in the capital cities fixing the supply issue; as the old saying goes “the cure for high prices is high prices”. We may see vacancy rates fall to a point before any rent rises actually kick in (a policy lag) or other factors stop rent rises since NG isn’t the only factor driving rent prices. New apartment construction has already tanked in response to the uncertainty coming. I would imagine there might be different short term effects (e.g prices falling) vs long term as well (rents rising higher or falling less) due to people not building?

  8. Hmmmm, I have also written about NG and it’s impact on the housing market and for mine, most of what is being said seems to me to fail the sniff test.

    Upon reflection, I think it is silly to look back at something that happened in the mid-80s and for a short period (although I am guilty of doing this too) as the key to what could happen in the future.

    Two completely different worlds!

    Does anyone really think they can lift rents by as much as 20%?

    Most don’t understand what a vacancy rate actually measures and it is a very poor indicator of rental supply – there is far more available housing space to rent – hence rents haven’t risen much in recent years despite low vacancy rates.

    Rents are increasing influenced by wages and security of work. The only way a landlord can reliably get more rent is to have more tenants.

    There will also be more new investment housing if NG applies to new builds only and these should feature dual+ occupancy product.

    I reckon the removal of NG on established stock is a very smart move. And it should be done ASAP regardless of cycle.

    For more: https://matusik.com.au/2017/12/05/matusik-mindset/

      • Michael MatusikMEMBER

        My point is that the vacancy rate is a specific metric, which by its very measurement, only captures a small proportion of housing space available for rent. My experience is that many find a rental space before it is promoted as vacant. No half decent investor lets a property become vacant – they have it filled weeks before tenants move out. And most vacant sharing spaces (a very big and growing trend) are filled without a dwelling being vacant.

        Also about half of Australia’s rental property isn’t managed by a real estate agents – close to a third is leased between family members – they don’t promote the space, digitally, as vacant.

        In fact about half the statistics used to argue RE these days are just noise – what gets measured in property is the easy stuff not the stuff that matters, is accurate or bears any real influence.

        I would like MB to cut back on being part of this problem and only reporting/seeking comments on sound analysis. I have been a supporter for some time, but MB have joined the social media noise and I think they are doing themselves a disservice.

      • “I would like MB to cut back on being part of this problem and only reporting/seeking comments on sound analysis. I have been a supporter for some time, but MB have joined the social media noise and I think they are doing themselves a disservice.”

        Examples?

      • Michael MatusikMEMBER

        UE – thanks – I will come back to you. I don’t post anything lightly, so my reply will be given due process/thought. Give me 7. Michael

  9. SQM: “Rents rose above inflation between 1985 and 1987”
    I think this is demonstrated to be true.

    MB: “Rents rose above inflation between 1985 and 1987. But they rose at a higher rate in the period before negative gearing was scrapped and also rose higher after it was reintroduced. Therefore it cannot be ascertained that removing negative gearing had any effects”
    This is also true.

    The problem is of messaging. The first is easier to understand for most people. Once you get into details the public loses interest. Politicians know that – that’s why they keep their messages simple and get people to connect the dots. “Rents rose above inflation between 1985 and 1987” + “Negative gearing was abolished between 1985 and 1987”. A politician cannot be accused of lying if they only tell the half of a truthful story.

  10. If I understand it correctly, the argument that rents will rise after NG is abolished is because the landlords will have to recuperate their higher holding costs. As I see it this will only affect investors of established properties who plan to purchase and negatively gear them from around 2020 onwards (or whenever the policy is enacted), a very small percentage of overall rental properties. Of those small percentage of rental properties, how will those landlords justify being able to charge higher rents than all the other currently NG grandfathered properties or positively geared properties who’s holding costs will not rise? If the landlords could raise rents higher they would have already done so.

    • Agreed. All these people who think that the cost of a resale good has anything to do with the price consumers are willing to pay for that good are in for a rude awakening. They won’t be successful in raising their rents… the market won’t support it. One Sydney dogbox is equivalent to another one, and right now, there are plenty spare ones to go around.

      As resellers (or rent seekers), they should carefully consider the price they’re paying, against what people are willing to buy/lease that good for, from them, before making a purchase decision. And if the price of that good goes up to more than what the market has shown it’s willing to pay, well, best find a different product with different market characteristics to sell into.

      It’s just economics, not rocket science.