Podcast and AI test negative gearing claims

Negative gearing is in the news again with the Federal Government being urged to abandon or modify it to help ease the housing crisis.  Now, here at Flat Chat we know a tiny bit about negative gearing; basically it means investors can offset their losses on their rented properties against their personal tax.

But how can that be bad for the levels of rents or availability of housing? Surely allowing for losses can keep rents down.  And making it easier to invest will make  more properties available.  And if that’s the case, why are some politicians against it?

In search of answers, I tuned into a recent episode of the Elephant in the Room property podcast.  The Elephant is very much geared towards property investment and its hosts, mortgage broker Chris Bates and Veronica Morgan, a licensed real estate agent, buyers agent, TV property guru and property investment advisor, are as close to experts in this field as anyone.

Their podcast on negative gearing also strayed into related areas such as capital growth and depreciation, including a warning that a lot of what you make on the depreciation swings you can lose (up to a point) on the capital gains roundabout. Give it a listen – it’s quite fascinating.

But we still felt we didn’t have a clear enough grasp of the subject to explain it. And then we thought about that other hot topic – Artificial Intelligence.  So we logged into Chat-GPT and asked it questions. This “discussion” is what followed:

FLAT CHAT:

Please explain Negative Gearing in Australia and why people think removing it will lower property prices and rents.

ChatGPT

Negative gearing is a taxation strategy commonly used in Australia, particularly in the realm of property investment. Here’s how it works:

Investment Property Purchase: An individual purchases an investment property with the intention of generating rental income and potentially making a profit through capital appreciation (the increase in the property’s value over time).

Operating Costs Exceed Rental Income: In many cases, particularly in the early years of ownership, the operating costs associated with the property (such as mortgage interest payments, property management fees, maintenance expenses, etc.) exceed the rental income earned from tenants.

Tax Deductions: The investor can claim the loss (the difference between rental income and operating costs) as a tax deduction against their other income, such as their salary from employment. This reduces the investor’s overall taxable income, thereby lowering their tax liability.

Capital Gains: If the property appreciates in value over time and is eventually sold for a profit, capital gains tax is applied to the difference between the sale price and the purchase price. However, if the property is held for more than 12 months, only 50% of the capital gain is subject to tax.

Now, regarding the impact of removing negative gearing:

Potential Decrease in Property Prices: Many proponents of negative gearing argue that removing it could decrease demand for investment properties. Without the tax benefits provided by negative gearing, some investors may be less inclined to purchase properties, leading to a decrease in demand. This decrease in demand could potentially lower property prices, particularly in areas where investment properties are a significant portion of the market.

Impact on Rents: Similarly, some argue that removing negative gearing could impact rental prices. If there is less investment in rental properties due to the removal of tax incentives, it could lead to a decrease in the supply of rental properties. This decrease in supply, combined with steady or increasing demand for rental properties, could lead to upward pressure on rental prices.

However, it’s important to note that the impact of removing negative gearing is subject to various factors, and opinions on its effects are divided. Critics of negative gearing argue that it distorts the housing market, benefiting wealthier investors and contributing to housing affordability issues for first-home buyers.

They suggest that removing negative gearing could help rebalance the market and make homeownership more accessible. Overall, the debate surrounding negative gearing and its potential effects on property prices and rents is complex and multifaceted.

FLAT CHAT:

So, the theory is that by making home ownership more affordable, more renters will buy homes and therefore reduce the demand for rented properties…

ChatGPT

Yes, that’s one potential outcome. Making homeownership more affordable could indeed incentivize more renters to transition into homeownership. As a result, the demand for rental properties could decrease because some renters may choose to purchase homes instead of continuing to rent.

When more people transition from renting to homeownership, it can lead to a reduction in the pool of potential renters, thereby decreasing demand for rental properties. This decrease in demand could potentially put downward pressure on rental prices, as landlords may need to adjust their rents to attract tenants in a market with fewer renters.

However, it’s essential to recognize that the dynamics of the housing market are complex, and the relationship between homeownership affordability, rental demand, and rental prices can vary depending on numerous factors, including economic conditions, government policies, and demographic trends.

For example, while making homeownership more affordable may reduce demand for rental properties in the short term, it could also stimulate overall housing demand in the long term by encouraging more people to enter the housing market. This increased demand could potentially offset any initial decrease in rental demand.

Overall, the impact of making homeownership more affordable on the rental market is influenced by various factors and is subject to careful analysis to understand its full implications.

FLAT CHAT:

Is there any statistical evidence to back up these claims?

ChatGPT

There is empirical evidence and academic research that examines the relationship between homeownership affordability, rental demand, and rental prices, although it’s important to note that the specific outcomes can vary depending on the context and methodology of each study. Here are some key points from research in this area:

Homeownership and Rental Demand: Several studies have found that improvements in homeownership affordability can lead to a decrease in rental demand. For example, a study by the Joint Center for Housing Studies at Harvard University found that an increase in homeownership rates tends to reduce the demand for rental housing, particularly in markets where there is a high proportion of renters who are potential homeowners.

Impact on Rental Prices: Research also suggests that changes in homeownership affordability can influence rental prices, although the magnitude of the effect can vary. A study published in the Journal of Housing Economics found that an increase in homeownership rates tends to exert downward pressure on rental prices, particularly in markets where there is a significant overlap between the owner-occupied and rental housing markets.

Long-Term Trends: Longitudinal studies examining trends over time have found that changes in homeownership affordability can have lasting effects on rental markets. For example, research published in the Journal of Real Estate Finance and Economics found that improvements in homeownership affordability over a 10-year period were associated with decreases in rental prices in subsequent years.

Regional Variations: It’s important to consider regional variations in housing markets when assessing the impact of homeownership affordability on rental demand and prices. Different markets may respond differently to changes in affordability due to factors such as local economic conditions, housing supply constraints, and demographic trends.

While empirical evidence supports the general notion that improvements in homeownership affordability can reduce rental demand and potentially influence rental prices, the specific outcomes can vary depending on a range of factors.

Additionally, the complexities of housing markets make it challenging to draw definitive conclusions, and researchers continue to explore these dynamics through various analytical approaches.

FLAT CHAT

Is there any Australian statistical evidence or research to back up these claims?

ChatGPT

There is research and analysis conducted within Australia that explores the relationship between homeownership affordability, rental demand, and rental prices. Here are some sources and findings relevant to the Australian context:

Australian Housing and Urban Research Institute (AHURI): AHURI is a leading organization in Australia dedicated to housing and urban research. They have published numerous reports and studies examining various aspects of the housing market, including homeownership affordability and rental dynamics. Some reports provide insights into how changes in homeownership affordability may impact rental demand and prices in Australia’s housing markets.

Reserve Bank of Australia (RBA): The RBA regularly publishes research and analysis on the Australian housing market, including reports that discuss the interactions between homeownership and rental markets. While not specifically focused on the relationship between affordability and rental dynamics, RBA publications often touch on related issues and provide valuable insights into the broader housing market trends.

Academic Studies: There are academic researchers in Australia who have examined the relationship between homeownership affordability, rental demand, and rental prices using local data and statistical analysis. These studies may offer more specific insights into the Australian context and can be found in academic journals focusing on economics, urban studies, and housing policy.

Government Reports and Data: Government agencies in Australia, such as the Australian Bureau of Statistics (ABS) and state-based housing departments, also produce reports and data related to housing affordability and rental markets. These sources often provide statistical evidence and analysis relevant to understanding the dynamics between homeownership and rental sectors in Australia.

While I can’t provide specific statistics or findings without access to real-time databases, the sources mentioned above are reputable and authoritative avenues for accessing Australian statistical evidence and research on these topics. It’s worth consulting reports and studies from these organizations for more detailed insights into the relationship between homeownership affordability, rental demand, and rental prices in Australia.

FLAT CHAT

In conclusion, we were 100 per cent right in our thinking – it IS really complicated.