Melbourne University negative gearing study needs to be challenged over its methodology and assumptions: Terry Ryder

A nation like Australia should be able to have a sensible, rational, balanced debate on issues like housing affordability – but it seems we cannot because we have the media from hell. 

Mainstream media has been having a feeding frenzy recently over two documents about negative gearing and its impact on affordability – one a leaked report from Federal Treasury and the other a half-finished research paper by Melbourne University economists. 

Both apparently claim that scrapping negative gearing tax benefits would have only a minor impact on home values but at the same time would bring about a major improvement in housing affordability. 

There’s been lots of commentary on the significance of these documents, especially with regard to Federal Government policy, but I have not seen any media reports from writers who have challenged the documents. 

Their findings, apparently, are deemed to be factual and beyond scrutiny. 

The worst contribution to this endless and seemingly fruitless debate about affordability, its causes and its solutions, has come from the Melbourne University research paper. 

My first question about this is: why would the authors publish research that is not yet finished? It is, according to the authors, “preliminary and incomplete”. One of them says that when the research modelling is complete, the results may change, particularly the forecast size of the lift in home ownership. 

Given the sad record of this discussion being blighted by claims, counter-claims, pet theories and silver bullet solutions, why would academics who want to be taken seriously publish something that just adds to the quagmire of confusion because it’s still a work in progress. 

This paper makes some pretty big claims. Three-quarters of households would be better off, home ownership would surge and rents would rise but renters would be somehow better off. 

These are big statements. But they’re not justified or substantiated in any of the reports I’ve read. 

To try to understand why the authors think the suggested policy changes would have the big impacts they claim, I studied reports from six sources, including The Australian, the Financial Review, The Age and The Guardian. 

I’m still waiting for an explanation of the claimed outcomes. And I’m still waiting to come across a journalist who challenged the authors of the report on a number of matters, including their credentials, their motivations, their methodology and their assumptions. 

I’d love to see the mathematics that’s led them to their preliminary and incomplete conclusions. 

Here’s a core question they should be asked: how can you claim that the suggested policy would cause a 30% reduction in rental property supply, and therefore an increase in rents, but also claim that renters everywhere would be better off? 

From my study of media reports, it seems the authors are assuming that a 30% reduction in supply would cause a rental rise of only 2.4 percent – and that the Federal Government would financially compensate tenants for the higher rents that would result. 

Those are massive assumptions. No one in Australian media has challenged them. 

If they’re wrong and there’s no government compensation for higher rents, which would cost billions of dollars according to the report, tenants will be disadvantaged by having higher weekly occupancy costs, which would make it harder to save a deposit to get into home ownership. 

That whole argument falls apart if a future government offers no compensation. 

And keep in mind that other research tells us that last year, without any taxation policy changes to limit the supply of rental properties, house rents rose 7 percent in Canberra, 9 percent in Hobart and 5 percent in Melbourne. 

But, according to the Melbourne University boffins, eliminating one-third of the supply of rental properties would cause rents to change barely at all. 

It’s worth remembering that significantly higher rents resulted when a Labor Government scrapped negative gearing in the 1980s and then had to re-instate it a short time later because of the unforeseen adverse impacts. 

The university paper claims that property values would fall only 1.2 percent but somehow this insignificant decline in house prices would generate a massive rise in home ownership – from 66.7 percent to 72.2 percent. 

How have they come up with these very precise but unexplained estimates? 

They claim 30 percent of rental properties would be freed up and bought by Australians who would otherwise have rented. So we’re asked to accept that a 1.2% drop in prices would turn those who can’t afford to buy into people who now can do so. 

That’s another massive assumption that no one has challenged. 

Think about it. The Asking Price Index for Sydney houses sits at $1,356,500, according to SQM Research. A 1.2 percent reduction in prices would bring that down to $1,340,222. Apparently $1.356 million is unaffordable but $1.34 million is affordable to heaps of people. 

But those are Sydney prices. Let’s look at a city that’s a little less extreme, like Brisbane. The Asking Price Index for the Queensland capital sits around $614,000 and a 1.2 percent reduction would bring it down to about $607,000. 

The report authors want us to believe that this small change will cause a “surge” in home ownership rates in Brisbane. 

In a parallel universe, maybe, but not in the real world. 

There are other aspects of this paper that ought to be challenged – and would be if journalism played a part in the reporting of the housing industry. 

The claim that only the “rich” benefit from negative gearing is outrageous - and patently false, according to ATO data. 

There’s no explanation in any report I’ve read for the claim that 76 percent of households would be better off under the suggested policy change. We’re told only that the authors used “an economic model”. 

Surely Australia as a nation can do better than this. But while we’re saddled with such mediocre media and clueless politicians, we’re doomed to having this festering issue drone on for years to come. 

Terry Ryder is the founder of hotspotting.com.au ryder@hotspotting.com.au 

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