three common misconceptions with neg. gearing

A lot of people believe that negative gearing makes rent cheaper for all the poor souls out there who cannot afford to buy. Well let me explain three common misconceptions that make people believe this and how they are wrong.


Misconception 1: Investors who use negative gearing charge less for rent:

If you are a landlord and the maximum you can rent out your property for is $500 per week, then $500 is what you rent it out as.
Now let’s say negative gearing gets removed and you lose the ability to claim tens of thousands of dollars of tax deductions what do you do? Well you cannot raise rent, because you are already charging the maximum, if you raise rent no one would move in. So you are stuck charging $500 per week even though your costs have gone up.
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Misconception 2: If investors sell because negative gearing is removed, rent will go up:

Now some people also think that somehow if people are getting out as investors that will mean higher rent, however the house is still there - it does not disappear.
If it is sold to another investor they will rent it out - putting downward pressure on rent prices.
If it is sold to an owner-occupier - well that is one less family that needs to rent a property also putting downward pressure on rent prices.
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Misconception 3: If there are less property investors, building construction will go down over time (decreasing housing supply) and rent will go up:

Now this misconception would be true, but only in a world without town planners restricting how much can built at any one time. As new housing development is so restricted in most places in Australia it creates a situation where when investor demand does go up new housing starts do not go up, the same goes for when there are less investors housing starts will hold up – this is because demand still exceeds what is being allowed to be supplied by the government.

Even if all property investors left the housing market it is likely that demand from owner occupiers alone would be sufficient to fund all the housing that government allows to be built.

This misconception may however be true in the few Australian cities where they allow housing supply to be responsive to speculation by investors (e.g. Qld/Gold Coast and Vic/Melbourne), but not for elsewhere.
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PS I make no judgement on whether negative gearing should stay or go - if implemented properly it is a reasonable economic thing to do, however current capital gains exemptions tend to make our tax system less progressive (less fair).