REIA contradicts itself on negative-gearing policy (updated)

Further to my post of 21 May, I note that the Real Estate Institute of Australia (REIA) is now making two contradictory claims on Labor’s negative-gearing policy.

In mid May, the REIA launched its campaign claiming that if negative gearing for future purchasers is allowed only for new homes, rents will rise, because:

(a) investors, including investors in new homes, will be discouraged by the prospect of not being able to re-sell to negative-gearers (because the homes, even if they are bought new, will not be new at the time of resale); and

(b) construction will fall because the negative influence on construction due to this “discouraged investor effect” will outweigh the positive influence due to redirection of negative-gearers’ demand from established homes to new homes.

Point (b), although not trumpeted by the REIA itself, is the foundation of the BIS Shrapnel report on which the REIA’s claims apparently rely (although, for reasons explained in my earlier post, I don’t believe it). Moreover, point (b) is essential to the REIA’s argument, because negative gearing affects rents through its influence on construction, but not through its influence on whether existing homes are bought by owner-occupants or investors; to the extent that the negative-gearing deduction allows investors to outbid owner-occupants for existing homes, it simply turns owner-occupied homes into rented homes, and owner-occupant households into tenant households, so that the effects on the supply and demand of rental homes cancel out.*

But more recently, the REIA has also claimed (e.g. at the end of this press release and in the following two tweets) that investors are already rushing to beat the possible change in negative-gearing rules:

So, on the one hand, construction will fall because investors won’t be able to re-sell the homes to negative gearers; and on the other hand, investors are rushing to buy established homes notwithstanding that if the change goes ahead, they won’t be able to re-sell to negative-gearers! Clearly these claims can’t both be true.

But they can both be false; in other words, it is quite possible that

(i) allowing negative gearing only for new homes would put downward pressure on rents by encouraging construction, and

(ii) while inquiries from investors wax and wane for various reasons, the alleged need to beat the change in negative-gearing rules is not a major factor, because investors know that even if the change goes ahead, they will still be able to claim negative gearing on new homes.

But they will no longer be able to claim the 50% capital-gains discount, because it will be reduced to 25%. That, in my view, is a far more plausible reason why investors might want to “beat the change”. But even if they do, they won’t be able to re-sell the right to claim the higher capital-gains discount, just as they won’t be able to re-sell the right to claim negative gearing. So the “discouraged investor effect”, if it were real, should still apply!

Nevertheless, you can expect the REIA to keep preaching the need to “beat the change” — and to preach all the louder if those who are promising the change win the election — because its members’ incomes depend on keeping the market ticking over. Never stand between a real-estate agent and a commission.


* Tax rules can affect rents not only through the quantity of housing (which the present debate is about), but also through the utilization of the housing stock. The negative-gearing deduction, by reducing landlords’ net holding costs, enables them to wait longer to fill their vacancies, hence to hold out for higher rents. If, on the contrary, the deduction depended on keeping the property occupied, and not merely “available” for rent, landlords would be more anxious to get tenants and would therefore accept lower rents. But I am not aware of any political party proposing such a change.

[Cross-posted from Land Values Research Group.]

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