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Kohler's mistakes underline why negative gearing is threatened

By Graham Young - posted Tuesday, 5 April 2016


Alan Kohler is one of our best commentators on economics, so it says something about the strength of the establishment view opposed to negative gearing that his piece a week ago in the Australian (Why_the_election_is_a_referendum_on_house_prices) is so riddled with conceptual errors.

It also says something about unreal expectations of the effect the ABCC may have.

His thesis is that the next election will be a referendum on house prices (itself highly unlikely) because both the ALP’s negative gearing policy, and the government’s Australian Building and Construction Commission are aimed at lowering housing costs.

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The idea that tax regimes and building costs are the most significant factors governing housing affordability is wrong.

While they can have a significant effect, supply and demand are actually the most important.

If the federal government wants to cure housing affordability then it needs to lean on the states to ease planning restrictions so that more housing can be brought on more quickly.

It also needs to look at restricting the number of migrants coming to Australia, which, apart from the age profile of our population, is the greatest determinant of population growth.

In the twelve months to January, 117,968 dwellings were approved around Australia in the 12 months to September 2015. Over the same period population grew by 313,000. Assuming a household size of 2.6 people per dwelling we needed 120,500 dwellings to be constructed in addition to those needed to replace existing obsolete ones.

Net overseas migration in that period was 167,600, or just more than half the population growth. While less than migration in the recent past, which peaked at 315,000 in December 2008, it is still around the average, and the housing market is still trying to adjust for the close to 2% population growth that Australia has been sustaining in recent years.

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Kohler’s thesis is that limiting negative gearing to new housing will lower house prices. It’s certainly what the ALP policy claims although they are now trying to back away from that given the unattractiveness of a fall in property values to home owners. And it’s what the short term economics suggests will happen.

As an aside, the fact Labor appears not to have thought of the consequences of lowering housing prices is because they are attracted to abolishing negative gearing to increase the tax take much more than they are to housing affordability.

But the argument on negative gearing is more complex than that. While abolishing it, if only in part, will disrupt the housing market in the short term, over time it won’t in itself suppress house prices.

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This article was first published on the website of the Australian Institute for Progress.



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About the Author

Graham Young is chief editor and the publisher of On Line Opinion. He is executive director of the Australian Institute for Progress, an Australian think tank based in Brisbane, and the publisher of On Line Opinion.

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