It was a brutal assessment, and probably tactless as well, as he was selling our house the time.
Nonetheless, it puts the Real Estate Industry’s campaign against Labor’s negative gearing policy in perspective.
The ABC reports that “The group has produced pamphlets to be distributed during the election campaign that warn property prices will fall, rents will go up, unemployment will rise and the whole economy will be jeopardised.”
To the best of my knowledge, there has been no serious modelling done on the impact of the abolition of negative gearing. One of the reasons is that quantifying the causal connections in this market is extremely difficult. For instance, it’s difficult to get data on the extent to which investment in property will decline if the purchase of existing dwellings do not qualify for negative gearing.
There is no doubt that one of the incentives to purchase property for rental will have disappeared with restrictions on negative gearing, but as investors move out of the market, there is a high probability that first-time buyers will move in. Again, is very difficult to get reliable data on the extent that this will happen.
One of the paradoxes about estate market lies in the fact that housing availability is a factor of the relationship between price of houses and amount of money that people earn. If you want housing affordability to improve, then you can do two things, or one of two things: Drive the price of houses down or increase wages. Both of which are difficult for a policy perspective.
But if the Real Estate industry is correct, then falling property prices will benefit first-home buyers who may move into the market and maintain the rate, if not the value, of sales.
So here is how it would work:
As negative gearing declines, housing investment will also decline. (The S at the end of the arrow means that these two variables move together in the same direction). As housing investment declines, housing availability first home buyers goes up. (The O at the end of the arrow means that these two variables move together in the opposite direction). Using these two simple rules, you can walk around this causal loop diagram.
One thing that is worth noting is that there is a delay before purchasing power pushes house prices up. This means that increases in wages will improve housing affordability in the short-term, but increasing affluence will serve to push prices up again in the long-term.
So what we make of the Real Estate industry claims?
- Property prices will fall: Probably not, and if they do, not significantly. Negative gearing is a minor factor in house price fluctuations.
- Rents will go up: Again, probably not. Renters will move out of the rental market to buy properties so the stock of rental properties will probably meet demand.
- Unemployment will rise: Absolute nonsense.
- The whole economy will be jeopardised: Truth in advertising has never been a strong point in the real estate market.