If you’re not a property investor, your retirement plans don’t matter, says IPA


by Dr Gavin Putland

Professor Sinclair Davidson for the Institute of Public Affairs has written an “occasional paper” under the title “What politicians need to know about negative gearing”, opposing the known Labor policy of allowing negative gearing only for new homes (with grandfathering), and the possible Coalition policy of imposing some sort of cap on negative gearing for each taxpayer.

Much of the paper is spent trying to demonstrate that, in the words of the executive summary (p.2), “Low and middle income earners benefit most from negative gearing.” I don’t need to respond to any of that argument, because it is irrelevant to the policy conclusions that Davidson wishes to draw. The Labor policy of limiting negative gearing to new homes is based not on the premise that negative gearing is a rich person’s game, but rather on the premise that negative gearing should act as an incentive to increase the supply of housing. The socio-economic status of the people responding to that incentive is beside the point. On the Tories’ side, any viable policy of capping negative gearing will not be based on the premise that negative gearers are rich. On the contrary, if the policy is to win more votes than it loses, the cap must be set so that the vast majority of negative gearers are not rich enough to hit the cap. The proponents of this policy might even end up thanking Davidson for doing some of their number-crunching for them.

After lecturing us on who the negative gearers are, Davidson warns that “Changing negative gearing will make it more difficult for these Australians to provide for themselves in retirement” (p.2), and “Being a Landlord offers an opportunity for low and middle income earners to develop their own business and so build up a nest egg for retirement” (p.15).

Excuse me, Professor, but what about the retirement plans of the five sixths of Australian taxpayers who are not landlords, negatively geared or otherwise?

If you want to retire in reasonable comfort, it helps to own your home outright, so that you are not burdened with rent or mortgage payments after you stop working. Hence you want to be able to buy your first home while you are still young enough to pay off the mortgage. Hence you don’t want to be competing with investors who can augment their borrowing capacity through the negative-gearing deduction while you can’t. While you are still renting, you want the rent to be low enough to leave you enough spare income to save a deposit. Hence you want negative gearers to add to the overall supply of housing — not merely outbid prospective owner-occupants for established homes, turning homes-for-sale into homes-to-let and throwing the prospective owner-occupants onto the rental market. And if your circumstances are such that home ownership is not a realistic option, you want the rent to be low enough to leave you enough spare income to save for your retirement in other ways.

In an attempt to refute the claim that Labor’s policy would increase supply, Davidson complains that the policy would create “barriers to entry” in that new investors would be forced to buy expensive new stock instead of cheap existing stock (pp. 2,5,14). One might think that prices are also influenced by “location, location”. Yet, in a paper about property investment, Davidson has managed not to mention location or locality or any synonym that I can find — a remarkable achievement.

Davidson further complains that supply would be impacted by “illiquidity” (pp. 5,14), which apparently means that grandfathered properties would not be offered for resale (p.14). But if the non-transferability of grandfathering turns a home for sale into a home to let or a home occupied by its owner, it does not change the balance between overall supply (for sale or to let) and overall demand (for owner-occupation or rent). This neglect of the fungibility of supply and demand is the basis of the standard fallacy in defence of negative gearing, which conveniently forgets that if a dwelling for sale is not bought by an investor, adding to the supply of rental accommodation, it will be bought by an owner-occupant, reducing the demand for rental accommodation.

Only to the extent that landlords contribute to the rate of construction can we conclude, as Davidson does (p.15), that “they provide valuable housing stock and residential space to the population.” Otherwise, concerning the alleged opportunity to “build up a nest egg for retirement”, we must ask “Whose retirement?”

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