Many people believe that in 1985-87, when Negative Gearing was abolished in Australia by the Hawke/Keating government, that rents rose, and rose dramatically. This is certainly the assertion of the Turnbull government as part of its 2016 Federal Election campaign strategy in which the spectre of massive rent rises coupled with a dramatic fall in housing prices is daily utilized as a scare campaign.
In fact, during that period 1985-1987, while rents did rise in Sydney and Perth as NG was abolished, they fell in Adelaide, Hobart and Brisbane and remained steady in Melbourne. In other words there was no relationship between the abolition of Negative Gearing (NG) and rental prices in that period.
The predominant reason that rents increased in Sydney and Perth during that time was tight rental vacancy rates. Sydney, in particular had very low vacancy rates (less than 1%).
If the abolition of Negative Gearing leads inevitably to rent increases it should have done so in all cities during 1985-1987.
It did not.
This alone is enough to disprove that abolition of Negative Gearing has a dramatic influence on rents.
Even the recent (March 2016) BIS Shrapnel report which modelled a particular set of assumptions about Negative Gearing and which has been used by the Turnbull Government to forecast general economic disaster should Negative Gearing be abolished, agrees that rents did not rise during 1985-1987. It says
neither rents nor dwelling prices displayed any notable change of behaviour or deviation from trend during 1985-87 [when negative gearing was abolished]
The CEO of the Commonwealth Bank, Ian Narev, whose bank owns a $400 Billion property portfolio says that Negative Gearing is only a minor influence on housing prices. He said:
I can tell you having a $400 billion home loan book – your assumptions on unemployment and what’s happening in global interest rates will dwarf whatever assumptions you’ve got on the modelling about the impact of negative gearing by a factor of…I can’t tell you the number but it’s a big number.
It would appear that the BIS Sharpnel model is drivel.
Macrobusiness characterises the BIS Sharpnel modelling outcome as hoplessly inconsistent on its own terms:
[BIS Sharpnel say] restricting negative gearing to newly constructed dwellings would somehow crash dwelling construction, raise rents, and destroy employment, the Budget and the economy? Even in its own terms this makes no sense. How does a sagging economy and rising unemployment lead to a rental cost spike?
One should also note that the NG scenario that BIS modelled is significantly different from the actual policy that the ALP has proposed, though Prime Minister Turnbull and Treasurer Morrison used the BIS Sharpnel scenario to criticise the ALP’s NG proposals.
So Why, Then, Was Negative Gearing Restored In 1987 ?
We are thus left to answer the question: So if Negative Gearing has a negligible effect on housing prices and rents, why then did the Hawke/Keating government resume Negative Gearing in 1987 ? My assessment is that they caved in to political pressure, possibly due to the upcoming NSW State Election being fought in a climate of rental stress and declining construction activity.
The Cabinet Submission prepared by Keating in 1987 said, in general agreement with Ian Narev above, that
Evidence suggests local factors rather than tax measures dominate in metropolitan rental markets
But the submission nevertheless stated an expectation that Negative Gearing would re-stimulate the construction sector, which had dropped off over the prior 18 months, during the time that Neg Gearing had been abolished. Keating’s submission said
restoring negative gearing could be expected to provide some stimulus to construction in the medium term
This ‘expectation’ of Keating’s is nowhere backed by evidence in his submission.
As we have already noted, the actual available evidence (listed in detail in the submission) points to ‘local factors’ driving rents. Not Negative Gearing..
My contention is that Keating was feeling political heat and just wanted to be seen to be doing something to assist the Building Construction sector and ease rents. But he knew re-establishing Negative Gearing wouldn’t help much, if at all.
The failure of Negative Gearing In Australia to provide its stated aims of stimulating Housing Construction and reducing rents is well-established by the prominent Australian economist Saul Eslake.
An Expensive And Failed Policy
In 2013 Eslake noted that 92% of housing investors buy established dwellings, so NG has not significantly improved housing supply. All it does is assist investors to buy established homes, this bidding up prices on the existing housing stock.
Eslake also notes that in the decade 2001-2011 Australian Housing Stock grew at a rate less than the population growth. Negative Gearing has simply been ineffective at increasing housing supply to any significant extent, if at all.
In fact, by rewarding speculative investment in Housing, The National Housing Supply Council, of which Eslake is a member calculates that NG has assisted in the suppression of investment in new housing during 2001 and 2011, such that the national housing stock was 228,000 dwellings less than would otherwise have been under historical rates of housing formation.
In summary then
- Abolition of Negative Gearing did not increase rents between 1985 and 1987
- Negative Gearing does not stimulate housing construction
- Negative Gearing is a very minor factor in housing prices
- Negative Gearing does not reduce rents
- The March 2016 BIS Sharpnel report is based on a faulty and self-contradictory model of Negative Gearing effects.
Under The Milky Way 