Should Negative Gearing Be Abolished?
Removing negative gearing would lift homeownership rates to as high as 72.2% of households, reduce home prices by 1.2%, and raise rents marginally, according to a new study presented to the Reserve Bank of Australia’s Research Workshop 2017.
Preliminary results from the economic modelling exercise, entitled Negative Gearing and Welfare: A Quantitative Study for the Australian Housing Market, concluded that eliminating negative gearing altogether would lead to an overall welfare gain of 1.5% for the Australian economy “in which 76 percent of households [would] become better off.”
“However, the welfare effects are heterogeneous across different households. Renters and owner-occupiers are winners, but landlords, especially young … high earning landlords, lose,” said Melbourne University researchers Yunho Cho, Shuyun May Li, and Lawrence Uren.
“Our model shows that eliminating negative gearing would reduce housing investments and house prices, and increase the average homeownership rate. Comparing across the stationary equilibria, removing negative gearing increases the average homeownership rate by 5.5 percent.
Lower house prices boost affordability, as both the downpayment required for mortgages and the transaction costs associated with home purchases decrease. “This particularly benefits those low-income credit constrained households who were at the margin of being homeowners, and the improvements in the homeownership rate are prominent among these households.”
Uren stressed that the research was incomplete, and that the size of the lift in homeownership could be revised down. However, the directions of change and magnitudes were unlikely to change much.
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