SQM Research attacked over dodgy negative gearing modelling

By Leith van Onselen

SQM Research’s managing director, Louis Christopher, has been forced to defend its negative gearing modelling, which has been used by the Coalition to argue that rents would surge under Labor’s reforms. From The New Daily:

On Tuesday, Mr Morrison cited SQM research in arguing that rents could rise by more than 20 per cent under Labor’s proposals…

Just three years ago, Mr Christopher did not believe Labor’s negative gearing changes would lead to rent increases and penned several articles saying rents would not rise. He denied he had “flipflopped” on negative gearing.

“In 2016 the rental market was quite different to the one we have now. New rental stock was building up due to the boom so the rental outlook was more benign at the beginning of that year,” he said…

The research the Prime Minister is using to make his claims is contentious.

It was prepared by Mr Christopher, who is an investment analyst running a business that employs 16 people. When the report was released in March, critics – including the Grattan Institute – questioned its assumptions…

In his research, Mr Christopher claimed that rents would go up by as much as 22 per cent in Brisbane, 20 per cent in Perth, 15 per cent in Melbourne, 15 per cent in Adelaide, and 10 per cent in Sydney, Hobart and Canberra over the period 2020 to 2022.

“We’ve got a track record of getting it right,” Mr Christopher told The New Daily.

“Look, we put it out there. I have always expected a bit of heat. But people need to play it straight.”

The SQM research was seized on at the time by Treasurer Josh Frydenberg to claim that rents might rise by $5000 a year if negative gearing changes were introduced…

The Grattan Institute’s Danielle Wood said she was shocked that Mr Morrison was making the claims based on SQM’s research.

She said it was difficult to understand how it had arrived at the figures in the report, when the most likely outcome was “no change” as a result of negative gearing reforms.

“It’s not credible and I am concerned if he is using property investor modelling to support his claims,” she said…

“It’s misleading, because it is renters who are the people who stand to gain the most if one day they hope to own a home under Labor’s policies.

MB has already comprehensively debunked SQM’s modelling (see here and here), so I won’t rehash it. What I will say is that Louis Christopher’s defence that he supported negative gearing in 2016 because “the rental market was quite different to the one we have now” is disingenuous.

Christopher supported Labor’s negative gearing reforms all the way up until March 2016, arguing that it would boost supply and lower rents, before miraculously doing a U-Turn and arguing the exact opposite in ‘modelling’ released in June 2016.

Below is a summary of Louis Christopher’s prior testimony in support of Labor’s policy:

Throughout 2015, Christopher argued repeatedly to reform negative gearing. On 11 March 2015 he noted the following with regards to the Abbott Government’s refusal to reform the tax lurk:

“We are of the belief that the less government intervention there is in the property market, the better. Governments all round should be doing more to promote housing affordability, not unaffordability.

Reducing negative gearing, a highly distortionary policy, would have a far more beneficial effect on promoting housing affordability. If negative gearing was repealed or altered, investors who are now gobbling up property would back off buying houses, which is what those who are demanding lower dwelling prices want to see…

So, if anything needs to be done, it is to eliminate existing distortions, and not introduce more”.

Christopher followed-up on 30 March 2015 with a strongly worded piece arguing that negative gearing should be restricted to new dwellings in order to boost dwelling supply (i.e. Labor’s policy):

“I firmly believe negative gearing should be restricted to new residential real estate. By allowing negative gearing on new residential properties and off-the-plan developments, we are providing a proper tax benefit to where it is justified and needed most: the construction and development of new dwellings.

That was the original purpose of negative gearing. The tax benefit was actually first introduced in 1936 with the direct aim to increase the supply of housing and move the economy forward from the Great Depression.

The problem is when it is applied on existing properties there is no real tangible economic benefit. Instead, it is unnecessarily stimulating demand on existing housing and, therefore, pushing house prices artificially upwards and so, damaging affordability.

Now in all this, if negative gearing is restricted, it will unlikely mean dwelling price falls everywhere. The market is driven by many factors including population growth, interest rates, the exchange rate and, of course, the health of the economy. However, I would expect a moderate correction, where investor demand has been very strong in recent times, such as the Sydney housing market…

If governments wish to improve affordability in the market, restricting negative gearing to new homes would be ideal. It would stimulate new housing and reduce investor activity on existing housing”.

On 17 April 2015, Christopher continued:

Louis Christopher this morning told SmartCompany he was disappointed in the Prime Minister’s “hypocritical” decision to leave negative gearing unchanged.

“Now would have been a perfect time to implement changes, given the market is on a little high, it would have been able to withstand any changes now, rather than in a period of downturn,” says Christopher.

Christopher says given the backdrop of the budget black hole and a housing affordability crisis, a reform would have been a “vote winner” for the Abbott government.

“Tony Abbott now has hardly any leg to stand on when talking about tax reform and tightening our belts and so forth,” he says.

“The changes will fall on the working class, when he’s willing to give breaks on big companies and breaks on investors, it’s hypocritical. This will be a vote loser”…

Christopher also says the decision seems to go against the direction of Abbott’s own Treasurer, Joe Hockey, and believes the PM is listening to “self-serving” voices and not looking at the bigger picture.

“It’s stupid from a property market perspective. He’s failed.”

In February 2016, Christopher appeared on Sunrise to push the case for Labor’s negative gearing reform, while also debunking the notion that the temporary abolition of negative gearing in the 1980s pushed up rents:

Here’s the money quote:

“When you look at the facts, when you look at what rents actually did during that period [i.e. the 1980s], yes rents rose, but they weren’t rising any faster than what they did before the period, nor were they rising after the period as well. So the impact was actually negligible on rents”…

“The notion of having negative gearing on new property is not a bad idea because I think that will encourage supply and puts the concession where we need it most, and that is increasing the supply of new real estate, which will keep the rents at a stable level and make sure that we don’t have a long-term housing bubble”…

A few days later, Christopher appeared on The ABC arguing that Labor’s policy would most likely lower rents:

DAVID TAYLOR: [Christopher] says there’s no clear evidence that the Labor government’s policy to scrap negative gearing in the 1980s led to higher rental prices.

LOUIS CHRISTOPHER: The truth is that the rental period at that time, across Australia, was mixed.

There were some cities during this time which recorded falls in rents; there were other cities, namely Perth and Sydney, which were recording rises in rents above and beyond inflation.

DAVID TAYLOR: Louis Christopher, based on your numbers though, do you suspect that rents would rise if negative gearing was taken away, as property investors try to make up for some of the other expenses?

LOUIS CHRISTOPHER: What Labor has actually put forward is about stimulating new supply of property, so we think that that would put a little bit of a dent in that whole argument that “look, rents would dramatically rise”, because what they’re trying to do here is actually stimulate the supply side, and we think they would have some success in doing that.

Later in February Christopher argued that there would be no rent spikes or market decimation under Labor’s policy:

“Would there be a surge in rents?

In our opinion, we think no. And that is based on what happened in history as well as the fact that if Labor’s policy passed, it would keep negative gearing on new property…

Labors’ proposal to keep negative gearing on new properties would most likely ensure a strong supply side response to the market. We have seen such directed stimulus work on the markets before, namely in the form of various first home owner grants, so we are confident, the market is responsive to such stimulus.

We believe that should Labor’s proposal succeed there would be an adjustment period where, yes, many investors may stay away from existing property for a period of time, but only until such time that a rise in yields gives them incentive to start buying existing properties again. This would happen as investors would demand a higher yield to offset the lack of tax concessions.

But such a period would not go on forever. Once yields are higher, investors would then re-enter the market. Potentially yields could rise to the point where existing residential properties are cash-flow positive from day one, or at least, cash flow neutral. Which I believe would be a positive for the asset class over the long run…

But this adjustment does not necessarily mean there would be an outright “decimation of the market”. We may well likely see for example a period of stagnation in property prices for existing property. Or prices rising more slowly than rents”.

Finally, in March 2016, Christopher slammed the dodgy BIS modelling’s claim that rents would rise by 10% under Labor’s policy:

SQM Research managing director Louis Christopher also called the report’s findings, in particular a rent increase of 10 per cent, “hard to believe”.

“We think the opposite would play out – there would be a moderate increase in supply,” Mr Christopher said.

“Negative gearing is an existing distortion and the market will eventually adjust to the new reality,” he said.

Again, just three months later in June 2016, Louis Christopher performed a complete U-Turn and released ‘modelling’ claiming that Labor’s policy would smash dwelling construction and push-up rents, which he echoed in his latest modelling released in March 2019.

No wonder Louis Christopher is on the back foot.

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Comments

  1. “Mr Christopher, who is an investment analyst running a business that employs 16 people…”

    Boy, business is a booming in the economic bio-gas sector.

  2. A lot of his tweets are liking conservative political stuff. I’d hate to think he was letting his politics undermine the credibility of his business.

    Or perhaps he just owns a bunch of investment properties.

    • I assume most of the people who buy his research are property locusts. Just telling the people what they want to hear. I’m surprised he didn’t think that is previous contradictory views wouldn’t come back to troll him.

      • I suppose he’s at liberty to completely reverse his position overnight, and it’s just coincidence that his new view aligns with his politics. No need to invoke the Stasi. But he will need to understand that a lot of people will start to doubt his credibility.

    • Yes, Mr Christopher doesn’t help himself by using the same platform to promote his company’s research to re-tweet Chris Kenny et al. It’s a surprisingly amateurish approach to social media. No wonder people question whether there are political motivations behind the modelling his company produces.

  3. kannigetMEMBER

    He just re-analyzed the situation and decided all his economic modelling previously done contained a fatal error. He had forgotten to take into consideration his property portfolio and the need to be able to sell his property investments to another investor who can also claim negative gearing. The impact of not being able to transfer this value will ensure his already poor capital growth will be wiped out, especially now that the values are falling.

    Previously his analysis was spot on because he was not needed to write off losses on his property…

    He now has realised the mistake and now that he has factored this into his model his analysis is now spot on again.

  4. Hack interviewed Scummo the other day and he trotted out SQM’s lies, to which Tom Tilly replied that hasn’t the Treasury said it would not? So Scummo backpeddled and changed the subject.

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