The debate over negative gearing and its impact on the housing market is a complex one, with various experts offering differing opinions. The recent announcement by Treasurer Jim Chalmers to limit negative gearing for residential property to new builds only has sparked a heated discussion, with critics pointing to a failed experiment in New Zealand as proof of the policy's negative effects. However, a closer examination reveals a more nuanced picture, with immigration playing a more significant role in driving rental markets than the removal of negative gearing.
The argument against negative gearing is often based on the experience in New Zealand, where the Labour government's attempt to limit it led to higher rents and fewer rental properties. This is a common narrative, but it's important to consider the broader context. Tom Panos, a real estate expert, argues that the policy had the opposite effect of what was intended, but this claim has been challenged by other economists.
Leith van Onselen, Chief Economist at Macrobusiness, presents a different perspective. He suggests that the rise in rents in New Zealand was more closely tied to the massive surge in immigration, rather than the abolition of negative gearing. Van Onselen's analysis, supported by charts, shows that the growth in residential rents peaked in 2023, around the same time as net migration, and both subsequently dropped off sharply. This data challenges the notion that removing negative gearing directly caused rent increases.
Furthermore, the fall in New Zealand's house prices, which have plummeted by more than 30% since their peak in 2021, cannot be attributed solely to the removal of negative gearing. High interest rates, a ban on foreign buyers, lower migration due to Covid border closures, and zoning reforms in Auckland have all contributed to the market's downturn. Shamubeel Eaqub, a Kiwi economist, argues that negative gearing had no significant impact on rents or house prices, and that the market's fluctuations are more closely related to supply and interest rates.
The history of negative gearing in Australia also provides valuable insights. In 1985, the Hawke Labor government briefly removed negative gearing, leading to a surge in rents, but this policy was reversed two years later. Paul Keating, the Treasurer at the time, justified the U-turn by claiming it would enhance investment in rental properties and increase the supply of residential accommodation. However, the impact on rents was not uniform across all cities, with rental growth in Sydney and Perth, where vacancy rates were low, while other cities like Melbourne, Adelaide, and Brisbane experienced flat or declining rents.
In conclusion, the relationship between negative gearing and rental markets is complex and not as straightforward as critics suggest. While the removal of negative gearing may have some impact, it is often overshadowed by other economic factors such as immigration, interest rates, and supply. The case of New Zealand and Australia's past experiences highlight the need for a comprehensive understanding of housing market dynamics, rather than relying on a single policy as the sole solution.
