What would changing the rules do to housing supply?
For context: • ~2.4 million rental properties across Australia • ~54% are negatively geared (~1.3 million) • ~30% or ~389k are multiple investments (one person owning 2 or more) negatively geared
The controversy about negative gearing is that it allows losses on an investment property to offset other personal income.
That's a critical word – losses. Negative gearing is a subsidy for rents where they don't cover the full costs of holding a rental property.
So what's the natural consequence of removing negative gearing? Sub-economic rental properties become bad investments unless assured of large capital gains (PS. which can't be offset against income losses).
1. Removing negative gearing would force some investors to sell existing properties 2. This would increase supply, short term, for some owner-occupiers to enter the market – many would see this as positive 3. Once the most pressured landlords sell, remaining landlords will need to increase rents to generate cashflow positive returns.
4. Properties exiting the rental market will not be replaced with new ones until rents are high enough to support them, positively geared.
The above means rents go ⬆️⬆️⬆️ and supply goes ⬇️⬇️⬇️.
#BTR operators can't negatively gear so they need to ensure rents are always profitable, hence the need for generally higher rental rates.
Studies on the impact of negative gearing suggest it makes a 1-4% difference to house prices – in the margin of price movements. Changing stamp duty thresholds would arguably have a larger, more measurable impact on the cost to consumer of buying a home.
🤔In my view, rent pricing will be lowest under the current negative gearing regime with private landlords. Removing negative gearing will simply change the operation of subsidies – from something which a landlord can use directly via tax breaks, to needing more rental subsidies to be paid directly to renters (and ultimately passing to larger institutional landlords).
😈This is more about the politics of addressing something that sounds very evil – negative gearing – and individual wealth generation than the specific contribution it will make to improving the housing crisis.