Removing negative gearing would lift home ownership

Preliminary results of a study show that discarding negative gearing would cut home prices by 1.2%

Removing negative gearing would lift home ownership



Discarding negative gearing would boost the average home ownership rate to 72.2% from the current 66.7%, a study found.

The majority of Australian households will gain from the removal of negative gearing, with the overall welfare of the economy estimated to improve by 1.5%, results of the study show.

The results were released last Friday and presented at an RBA event last month. The researchers emphasised that the study was incomplete and preliminary, and that the increase in home ownership could be revised down.

“Our model shows that eliminating negative gearing would reduce housing investments and house prices, and increase the average homeownership rate. Comparing across the stationary equilibria, removing negative gearing increases the average homeownership rate by 5.5%,” said Melbourne University researchers Yunho Cho, Shuyun May Li, and Lawrence Uren in their paper.

However, the impact of the increase in welfare would be heterogeneous across households. “Renters and owner-occupiers are winners, but landlords, especially young with high earning landlords, lose,” said the researchers.

Getting rid of negative gearing – a process in which buyers can deduct housing investment losses from their gross income – would cut home prices by 1.2% and increase rents only slightly. 

“As the supply of rental properties falls, rents increase but only marginally because its demand also falls. The small increase in rents also makes homeownership relatively less expensive and this leads renters with high earnings to become homeowners,” said the researchers.

With the fall in house price and the increase in rent, the price-to-rent ratio goes down by 4.2%, according to the researchers’ simulation. It suggests that the average size of homeowners’ mortgages decreases by 21%.

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