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Source for above is here.

Recently Domain published a comment piece by Jamie Alcock, associate professor in Finance at the University of Sydney Business School, titled, “Busting the five myths about negative gearing“.

The first issue with the article is the lack of any references to support the points he is trying to make. I do not presume this is his decision, it is simply common practice in mainstream media comment articles.

The second issue is, “What is his long-term objective/purpose for the Australian housing market?”

From near the end of his article I get the sense he believes a good outcome for the housing market is when house prices increase:

Even if the opponents of negative gearing are correct, and abolition did reduce house prices, how much wealth would be destroyed? A 10 per cent reduction in average house value equates to a $570 billion wealth destruction. This is people’s life savings and retirement plans, and it would hurt those currently with mortgages most heavily. Destroying wealth in one sector of the community to increase wealth in another is simply a wealth transfer form one group to another.

Similarly, making changes to tax rules that hurt the entire country simply to help a select few in Sydney and Melbourne is a wealth transfer from the regional areas to the city.

I also get the sense that he does have a clear position on negative gearing from this part of his comment, “making changes to tax rules that hurt the entire country simply to help a select few in Sydney and Melbourne is a wealth transfer from the regional areas to the city.”

Jamie Alcock’s position on negative gearing appears to be, ‘negative gearing benefits the entire country‘.

While he may hold the view that negative gearing benefits the entire country, I do not see his article as an attempt to argue for his view, but simply as an attempt at arguing against those who believe the negatives of the negative gearing policy outweigh the positives.

Before going further, I will put it on the table that my long-term objective for the Australian housing market is for the majority of Australians to have the opportunity to own their own home outright, before they reach retirement age. In terms of how to achieve that, I believe that the demand boosters and supply restrictions that exist in the housing market which put an upward pressure on prices should be progressively wound back according to this rule:

If average house prices rise by more than the equivalent of three per cent per year, over any three month period, wind back the maximum loss that can be claimed from a negatively geared property by ten per cent.

The three per cent figure is the Reserve Bank of Australia’s upper maximum target rate for inflation.

The same rule can be applied to other demand boosters and supply restrictions. The ten per cent figure is arbitrary.

Let’s continue.

Myth 1: Negative gearing is responsible for the recent house price surges in Sydney and Melbourne.

Negative gearing rules have been in place for more than a quarter of a century and the number of investors taking advantage of them has been stable for well over a decade. The recent price rises are more closely related to supply restrictions and falling interest rates.

I haven’t seen this myth being stated anywhere.

Jamie appears to be taking the view that negative gearing has played no part in the price rises in Sydney and Melbourne ‘because the quantity of negatively geared investors has remained stable’. Is there a source that shows the number of negatively geared investors over the past decade? Does it show the total value of investment loans they have outstanding over that time period? Investors have been playing a big part in the price rises and I doubt the majority of them are doing so via positively geared properties. I have no doubt falling interest rates have had impact on prices too.

Myth 2: Negative gearing makes property unduly attractive for investors. All investments, including property, can be negatively geared. Property competes, as an investment, on a level playing field. Abolishing the negative gearing rules for property would cause a market distortion, not cure it.

Currently I am starting two businesses and I cannot offset a loss from either of them against a normal wage. Even if I borrowed money to start the businesses (gearing them negatively), I cannot offset the loss against a normal wage.

Therefore, the statement, “Property competes, as an investment, on a level playing field” is completely false.

I also do not believe I should be able to offset any loss from the two businesses I am starting against a normal wage. The losses should be quarantined to any future profit the businesses may make.

Likewise, any loss made from a residential investment property should only be able to be offset, if they are allowed to be offset at all, against future profits from that investment property.

Myth 3: Negative gearing pushes aggregate prices out of the reach of average Australians.

There is simply no evidence that prices are skewed out of the range of the average Australian. The RBA made this clear to the Senate inquiry ? the current cost of servicing new loans on housing in Australia is significantly lower than the average over the past decade.

There is no evidence that average house prices are rising faster than average wages?

From the March Quarter 2014 to March Quarter 2015, what was the weighted average increase in house prices across the eight capital cities in Australia? Answer: 6.9% (Source: ABS)

From the March Quarter 2014 to March Quarter 2015, what was the percentage increase in total hourly rates of pay excluding bonuses in Australia? Answer: 2.3% (Source: ABS)

If average house prices are rising at 6.9%, that’s an annual increase of $41,400 on a $600,000 house. If average wages are say $60,000, then an annual increase of 2.3% is $1,380.

If average house prices are rising by around $40,000 per year and the average Australian wage is only increasing by around $1,400 per year, then the statement, “there is simply no evidence that prices are skewed out of the range of the average Australian” is false.

Although, it does depend on how tricky you want to be with language. If you believe that it’s OK to have a housing market where most people on average incomes can be “within reach” of entering the housing market in some form, such as buying an investment property because they can’t afford to buy a property as an owner occupier, or increasing the maximum loan terms from 25 to 3o years and then 35 to 4o years and then making the average mortgage something you pass down to your children then according to your view there’s nothing to worry about.

As to the degree to which negative gearing plays in putting an upward pressure on house prices compared with the many other demand boosters and supply restrictions, that’s not something I would attempt to speculate on.

Myth 4: Negative gearing benefits the wealthy at the expense of the poor.

Taxation statistics from the ATO show that of those declaring a net rental interest in recent years; approximately three-quarters earn less than $80,000 per annum.

Do three quarters of them have jobs that pay less than $80,000 per year? No (Source: ABC).

Even if 100% of people using negative gearing were on the average wage, it wouldn’t be a reason to keep the policy in place.

As a minimum, any loss from residential property investment should be brought forward until and if that investment makes a profit.

Myth 5: Negative gearing rules make it more difficult for first home-buyers to enter the housing market.

…The reality is that by encouraging investment in housing, the supply of rentals increases which keeps rents low.

Encourage investment in housing? Keeping rents low?

Over 90% of residential investment loans are for existing houses, not for the construction of new dwellings (Source: RBA D6) . This means that investors are competing with first home buyers for existing dwellings and therefore making it harder for first home buyers to enter the market.

If investors stopped buying existing dwellings then first home buyers and home owners wishing to move house / upgrade / downgrade would take their place and less rentals would be needed because first home buyers would let go of their lease to move into their new home.

The thing that I see around Melbourne that increases supply is the number of subdivisions occurring on nearly every street I drive down. Buy an old run down house, demolish it, build two or three houses/townhouses on the same block of land. It’s an increase in supply which puts a downward pressure on house prices (other things being equal) and guess what part negative gearing plays in that activity? None.

Developers, builders and investors can all buy an old run down house, demolish it, subdivide and get a house builder to build two or three townhouses on the same block and then sell them, without having to claim a loss against their wage.

If they see the project as profitable, then they will do it, because it’s profitable.

David Collett