Pollies tell fibs about negative gearing
By Ross Gittins
August 25, 2003
We all know that when Paul Keating got rid of negative gearing in 1985 this proved disastrous for the rental market and he was forced to restore it.
We all know this because the politicians - from John Howard to Simon Crean - keep reminding us of it.
There's just one small problem: it's not true. It's remarkable how bad we are at remembering events - and how easily history can be rewritten by people with an axe to grind.
A negatively geared property investment is one where you borrow such a high proportion of the cost of the property that your interest payments and other expenses exceed the rent you earn. You then deduct this operating loss against taxable income from other sources.
In July 1985 - and as part of a much bigger tax reform package - Treasurer Keating moved to "quarantine" losses from negative gearing by stopping them from being deducted against other income. The US Congress had already done something similar.
But, so we're asked to believe, this caused investment in rental accommodation to dry up. Vacancy rates fell very low and rents shot up. By September 1987 - just over two years later - Mr Keating was forced to admit his error and restore the old rules.
However, Saul Eslake, ANZ's chief economist, has gone back to check this story and can't find it.
His examination of the Real Estate Institute of Australia (REIA) figures for the capital cities shows that rents rose sharply only in Sydney and Perth (and the Bureau of Statistics' figures for dwelling rent don't show a marked increase for any capital).
If the tax change was causing trouble, you'd expect it to be showing up in all cities, not just one or two.
Mr Eslake's conclusion is that rents in Sydney and Perth surged because their rental markets were unusually tight for reasons that had little to do with the tax change.
And this conclusion is supported by an earlier study by Blair Badcock and Marian Browett, geographers at the University of Adelaide.
They say Sydney was the only case that provides support for the claim that the tax change caused problems. "And even here the flow-on effects of the tax changes have to be weighed against the contribution of the general turndown in housing activity in Sydney to the deterioration of the vacancy rate and a real rise in rents," they say.
But the academics remind us of a factor the pollies gloss over: the central role that politics played in the whole affair.
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