Tony Abbott gets it wrong on negative gearing.

In his desire to score political points and to keep the scaremongering about Labor policies simmering, the Prime Minister has claimed that abolishing or restricting negative gearing will force rents up.

Changes to negative gearing being considered by Labor could force rents up, Prime Minister Tony Abbott has warned.  “If you muck around with negative gearing effectively you have put rents up,” he said.

The housing market is an extremely complex system and simplistic statements such as this one by Tony Abbott makes rational discussion of the problem or difficult.When you think of it, it’s something he’s lifted to an art form.

There are two important elements of the rental investment market to understand. The first is that investment in new dwellings increases the stock of housing available for rental. This was the original aim of the policy.  The second is that investment in existing houses does not increase the amount of housing available for rental but decreases the amount of housing available for purchase for owner occupiers.

This discussion is about the investment in existing properties.

This causal loop diagram shows how the dynamics work.  Click here to understand how to read a causal loop diagram.

 The causal dynamics of negative gearing
The causal dynamics of negative gearing

There are two drivers of the system: Negative gearing tax concessions and people entering the rental market.  Negative gearing encourages people to purchase rental properties. Young people leaving home and looking for somewhere to live provide the demand for those properties.

With investors competing with home-buyers for properties, prices rise faster than they would without that particular form of competition because investors generally bring more money to the market then the first-time buyer.  With investment pushing the prices up by competing for properties, sales to first-time buyers decline.

When these people are kept out of the market they become renters and this pushes the rents up.

Let’s summarise the logic: the more people invest (rather than buy) in the housing market the more young people cannot afford a house and are forced to rent.

Negative gearing actually pushes rents up. Exactly the opposite of what Tony Abbott was suggesting.

The logic works in reverse. If negative gearing is reduced (or, heaven forbid completely abolished), the amount of housing available first homebuyers would go up and the number of people chasing rental properties would decline. This would lead to a reduction in rents. Exactly the opposite of what Tony Abbott was suggesting.

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