Claim 1: If tax breaks for negative gearing were limited to offsetting rental income, landlords would pull out of the market. This would create a shortage of rental housing, and drive up rents. The victims would be the renters.
Response: This is a basic misunderstanding of something that is quite simple. If a house is not sold to a landlord, it will be sold to someone buying their own home. There will be one less home for rent, and one less household looking for rental accommodation. Supply will fall by one, demand will fall by one. There will be no change in the balance of supply and demand, hence no shortage, and hence no rent rises on this score. It would be different if investors stopped building new housing. But 91 per cent of lending to investors is for purchase of existing homes. One option for reform is to restrict the tax break to construction of new homes.
Claim 2: We saw what happened when the negative gearing tax break was abolished in 1985. Investors stopped building new homes and and rents soared. That will happen again.
Response: Sorry, but that is an urban myth. Yes, construction fell, but by investors and owner-occupiers alike, and why? Because interest rates soared to 17.5 per cent for investors and 15.5 per cent for owner-occupiers. Even so, construction by investors was a higher share of GDP in those years than in 2009.
As for rents, Bureau of Statistics figures show capital city rents rose 22 per cent in the two years when the tax break was abolished, and 23 per cent in the following two years after it was restored. End of urban myth!
Claim 3: Investors in all kind of assets are allowed to write off losses against income from other sources. To restrict rental investors to writing off losses against rental income only would introduce a new distortion that would simply push investment elsewhere.
Response: This argument normally has force. But when 70 per cent of housing investors are claiming losses, we have a distortion here and now. It is sending investment into activities that clearly do no good to the economy, and harm those who want to be able to buy their own homes.
