The Housing Industry Association is banging the drum today in favour of negative gearing as an influence on housing affordability.
Its weapon is research by Independent Economics, which the HIA commissioned. The Association argues it “confirms that restricting access to negative gearing for residential property would reduce investment in housing, erode housing affordability and put upward pressure on rents”.
Affordability and the impact of negative gearing are hot topics in the current debate around the booming property markets in Australia but particularly in Sydney and Melbourne.
The latest data shows that investors represented 40.3% of all new loans in July. This is the second highest percentage of total loans in the history of records – only eclipsed by data from October 2003 when the last boom ended. On the other hand first home owners are at all time lows.
Measuring affordability is always contentious but the HIA research essentially says that only the consumption element of housing (remembering you have to live somewhere so you are a consumer of that element) is important not the cost, per se, of the property, not interest rates or other factors.
While there are many ways to measure housing affordability, this report focuses on the price of housing services, which reflects the annualised cost of housing to both renters and owner-occupiers.
For renters, the annual cost of housing is the actual rent paid. This rent reflects house and land prices plus tax and expected long-term financing costs.
For owner-occupiers, housing costs represent the income that they forgo by living in their dwelling rather than renting it out. These ‘imputed’ rents are linked to the actual rents paid by renters.
Therefore, housing affordability for both renters and owner-occupiers are tied together because they are both influenced by the same factors over the long term. For both groups, the price paid for annual housing services depends on the cost of supplying those services.
This long-term view of housing affordability is more appropriate than narrow indicators, such as mortgage rates, which are affected by cyclical factors.
It seems an appalling miss by the researchers with far too narrow a definition to render the research relevant to the current debate on affordability or the real world.
Indeed they say that the those peddling the argument that “residential negative gearing increases the demand for residential property by investors, which raises the price of residential property and thereby makes housing less affordable for potential owner occupiers”, are wrong.
Rather the research says, “This would only be the case if the supply of housing is unable to respond to the higher demand from investors. That is, if the supply of housing were fixed, the higher demand for properties resulting from residential negative gearing would lead to higher prices for residential properties.”
They argue that housing supply is only fixed in the short term and if the housing market “operates efficiently, then the supply of housing can be perfectly flexible in the long term. In this case, long-term residential property prices will be driven only by the cost of supplying new housing.”
Importantly in the context of where the negative gearing debate might head the HIA says:
Since the availability of residential negative gearing boosts housing demand from investors, it inducesan increase in the supply of residential property. This higher supply leads to lower rents.
Overall it’s far too academic an argument to be applicable in the real world and to first home owners wondering if they’ll be able to afford a home rather than rent. The research also fails to recognise the impact of multiple short run increases on long run pricing and owner/investor behaviour.
But perhaps in suggesting that the real benefit to the community from investors is in their impact on the available supply of residential properties in the long run, the HIA has inadvertently just proposed the solution to the debate.
Only allow investors to buy new properties being constructed if they are going to claim negative gearing. In that way The HIA has just aligned the short and long run out comes for the economy, housing and affordability.
It’s a win win.