Image above by Jim Fischer.

The Australian newspaper’s Henry Ergas wrote an opinion piece yesterday arguing that lower income renters would pay the price if there were any changes to negative gearing in Australia.

He starts the piece with his goal, which is to destroy the statement made by Saul Eslake that negative gearing is simply a handout from workers to speculators:

Saul Eslake…claims..that negative gearing provides a “large subsidy from people who are working and saving to people who are borrowing and speculating”. Recurring every time property markets arise from their slumbers, this contention is not one to be tossed aside lightly: rather, it should be thrown with great force.

Henry makes a good point that a Government who becomes concerned about its finances would have to consider making adjustments to negative gearing.

He then admits that he is unsure why economists such as Saul Eslake argue that negative gearing is economically inefficient.

Henry states the benefit of negative gearing is that the overall tax rate for the investor is the same whether they are using equity or debt to finance the property and that if that neutrality were removed then investors would face more disincentives (by having to pay more tax) to purchase rental properties, which would then reduce their supply.

An example with numbers is provided to demonstrate the above point.

Abolishing negative gearing would, in other words, increase the tax rate on debt-financed rental income by 26 per cent, compared both to the tax rate on rental income from properties that were owned outright and to the tax rate on non-property income.

Yes, that is correct. If we remove the tax incentive available to property investors so they can only use after tax income to purchase property like other home owners, then there will be less demand for property. Less demand means prices will tend lower.

If less investors are buying property, who else will take their place at auctions?

People bidding to buy a house to live in. Homeowners.

If less investors are buying houses, guess what happens to renters?

They buy the houses and move out of their rental properties.

And to remove any doubt let’s go to the RBA website and look at table D6 Lending Commitments – All lenders, to find out how much of every $100 spent by  investors on residential property is actually spent on newly constructed property.

$6.

Yes, of every $100 spent by residential properties by investors in Australia, only $6 was on newly constructed homes.

It’s time to abolish negative gearing.

@TaxpayersParty