AHURI Report Dispels Negative Gearing Myth

The Australian Housing and Urban Research Institute (AHURI) recently released a report highlighting the fact that while Australia and Germany have similar negative gearing policies, the two countries have very different housing markets. The report – an in-depth review and comparison of the private rental sector in 10 comparable countries, including Australia, Germany, Sweden, Canada, Ireland, the United Kingdom, and the United States of America – joins others in confirming the growing belief that negative gearing is not responsible for high house prices.

But first, let’s take a step back. What is negative gearing, and how is it supposed to have negatively affected the housing market?

Negative gearing, according to google.com, is “the practice of investing borrowed money in such a way as to result in a loss that can be claimed as a tax deduction“. For property owners, a negatively-geared investment property can and generally will remain that way for several years, where hopefully (for the investor that is) the rental income will have increased with inflation to the point that the investment is positively geared (the rental income is greater than the interest cost). If you would like to know more, this article by Wikipedia is a great introduction.

So how does the report from AHURI play into this? 

By considering tax and finance settings, supply and demand, and the regulation of landlord and tenants, the in-depth and peer-reviewed report provides another reputable source to the growing amount of research that dispels common myths about negative gearing. The paper highlights that while Australian house prices have continued to rise, German house prices are relatively steady, despite both countries exempting owner-occupied housing from capital gains and providing the tax benefit of negative gearing for investors. This is, as the paper continues on to note, due to a “large private rental sector, low population growth, conservative lending by public financial institutions and rent regulation” in Germany. Even more revealing, the research shows that Europe is, in fact, not a land of renters – as is usually believed – and most of the European countries examined have higher rates of home ownership than Australia.

If this is the case then, why is housing so unaffordable in Australia?

As is highlighted several times in the news every day, the housing market in Australia is consistently ranked as unaffordable. There are several (complex) reasons for this, but most sources seem to agree that is a mix of supply and demand and a long-standing physical shortage of housing.

However, Macquarie Bank analysis of CoreLogic and Domain data suggests that dwelling price growth has stopped falling and are now beginning to see an acceleration in dwelling prices, as reported in The Australian Financial Review and in a private note that the Bank sent to clients.

Macquarie did caution that it does not expect a repeat of the 2016 bounce back in housing price growth, as data is showing that prices have begun rising modestly on thin volumes.

What this means is that whilst housing prices are contained or rising, and remain unaffordable, it is certainly questionable whether negative gearing is the cause, as some politicians in our community love to tell us.

Written: 31 January 2018, Updated: 6 April 2020

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