No, rents won’t increase by $2,000 a year because of changes to negative gearing

Over the weekend, we got some modelling that claimed the changes to negative gearing would increase rents by $2,000 per year, or $40 a week.

Now, economic modelling can be a powerful tool to understand the impacts of a policy change. But if it doesn’t properly capture relevant changes, it can produce completely nonsensical results.

If you can’t explain the result of an economic model, then you should be very suspicious of the results.

All current negatively geared properties have been grandfathered and will continue to get the benefits of negative gearing going forward. And newly built homes will still have access to negative gearing.

So, given this, why would rents increase?

The author of the modelling said that the changes would slash the supply of rental properties. Presumably, this is because investors will sell their properties.

But these houses won’t disappear. These homes will stop housing rental families and will instead house owner-occupier families. The same number of families are still being housed.

This can only happen if there are less renters and more first home buyers. Put simply, as investors leave the market, former renters become first home buyers.

Imagine you have 100 homes and 100 families. 70 families own the home they live in, and 30 homes are owned by investors and are rented out to the remaining 30 families who don’t own a home.

The government makes a policy change that is bad for investors, and 10 investors decide to sell up. Who do they sell the properties to? The policy change means investors are not going to buy them.

Existing owner-occupiers might buy them but that would mean their previous home would be up for sale.

The new buyers must come from those who were previously renting. So, after the change, of our 100 homes and 100 families, 80 are now owner-occupiers and 20 are renters.

After the policy change, there are 10 fewer rental properties, but there are also 10 fewer families wanting to rent because those previous renters have become homeowners.

But perhaps the rent increase from the model comes from a reduction in the number of new properties being built?

But under the government’s changes to negative gearing, this is unlikely to occur. Investors still get access to negative gearing (and the old capital gains tax discount) if they buy a newly built home. Any incentives that negative gearing previously created to build new homes still exists after the changes.

Another possibility is that the rent increase in the model comes from the fact that investors now have a smaller subsidy because they don’t have access to negative gearing. But there are problems with this reasoning as well.

Firstly, even if this were true, all existing investors have been grandfathered, so the impact can’t be large.

But even if this were not the case, landlords can’t just increase rents. If they could, then the question is really, why haven’t they done this before. The reality is that landlords are constrained by the market. They can’t just charge whatever they want.

As occurred during the 1980s when negative gearing was axed for a couple years, in some places rental prices grew faster, in some they slowed. The reason was due to the specific demand and supply in each city, not the tax changes.

It makes no sense that rents would increase because of the government’s planned changes to negative gearing, and just because an economic model says it will, doesn’t make the nonsensical make sense.