Removing negative gearing would lift home ownership

by Manuelita Contreras16 Jan 2018
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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COMMENTS

  • by Awesome Albert 16/01/2018 9:38:41 AM

    Money never sleeps - take away negative gearing for individuals and all that happens is corporations take over and claim the loss against future capital gains or other business profits in side a business entity. So once again small individual investors most of whom are PAYG and have very few ways of minimising tax are screwed over and large corporations benefit.
    Houses prices are where houses prices are because people are willing to pay not because of any tax concessions. If you want cheap houses move to the country where there is less competition.
    Who is really behind these studies?

  • by Ralph Rintoule 16/01/2018 11:02:49 AM

    History has shown us that when the Labour Party abolished negative gearing investors stopped investing in property and the public housing list went up out of control. Labour had to bring it back. the same will happen again if its implemented. also the slowdown in new housing due to lack of investors will actually increase housing prices. Remember the supply/demand rule?

  • by Reality Dose 16/01/2018 11:25:42 AM

    So looking at FHB's on their figures - which are vague. A $400,000 home would devalue by $4,800....still making it slightly above $395k.....and this is going to make a difference to a first home buyer getting a house, when they need a 7% deposit minimum ($28kdep $21k stamp duty/fees).
    Given the issue for first home buyers is predominantly getting a deposit together; and based on their premise, clients will need to save $350 less in deposit, and $250 less for stamp duty; whilst having their "rent increase". So in effect, instead of requiring $49k, they will only need $48.4k. By the time they save even a small part of it, a rent increase of any amount will have eaten up the miniscule saving and more.
    .....yea this'll be a game changer....not.