An interesting article.....
http://www.smh.com.au/articles/2003/08/24/1061663676588.htmlPollies tell fibs about negative gearing
By Ross Gittins
August 25, 2003
We all know that when Paul Keating got rid of negative gearing in 1985 this proved disastrous for the rental market and he was forced to restore it.
We all know this because the politicians - from John Howard to Simon Crean - keep reminding us of it.
There's just one small problem: it's not true. It's remarkable how bad we are at remembering events - and how easily history can be rewritten by people with an axe to grind.
A negatively geared property investment is one where you borrow such a high proportion of the cost of the property that your interest payments and other expenses exceed the rent you earn. You then deduct this operating loss against taxable income from other sources.
In July 1985 - and as part of a much bigger tax reform package - Treasurer Keating moved to "quarantine" losses from negative gearing by stopping them from being deducted against other income. The US Congress had already done something similar.
But, so we're asked to believe, this caused investment in rental accommodation to dry up. Vacancy rates fell very low and rents shot up. By September 1987 - just over two years later - Mr Keating was forced to admit his error and restore the old rules.
However, Saul Eslake, ANZ's chief economist, has gone back to check this story and can't find it.
His examination of the Real Estate Institute of Australia (REIA) figures for the capital cities shows that rents rose sharply only in Sydney and Perth (and the Bureau of Statistics' figures for dwelling rent don't show a marked increase for any capital).
If the tax change was causing trouble, you'd expect it to be showing up in all cities, not just one or two.
Mr Eslake's conclusion is that rents in Sydney and Perth surged because their rental markets were unusually tight for reasons that had little to do with the tax change.
And this conclusion is supported by an earlier study by Blair Badcock and Marian Browett, geographers at the University of Adelaide.
They say Sydney was the only case that provides support for the claim that the tax change caused problems. "And even here the flow-on effects of the tax changes have to be weighed against the contribution of the general turndown in housing activity in Sydney to the deterioration of the vacancy rate and a real rise in rents," they say.
But the academics remind us of a factor the pollies gloss over: the central role that politics played in the whole affair.
The REIA began campaigning against the move to curtail negative gearing even before it was put into effect. The estate agents predicted that ending negative gearing would have dire consequences for renters, and they really stepped up their claims of disaster in the federal election campaign of July 1987.
They managed to win the support of the Labor governments of NSW, Victoria and Western Australia, and they put the frighteners on Bob Hawke to the point where, in just the last week of the campaign, he agreed to re-examine the issue.
It may be significant that the decision to restore negative gearing came only a little over a month before the stockmarket crash of October 1987. It may be that the preceding boom had drawn investors' attention away from real estate, whereas the bust caused them to flood back.
Be that as it may, it seems clear that when today's politicians tell their porkies about why the abolition of negative gearing was reversed, what they're really saying is: if someone as tough as Keating got beaten by the real-estate agents, why would you expect a wimp like me to take them on?
Well, I think it's all in the timing. The time to move against negative gearing will be when the looming over-supply has finally caught up with the rental apartment market. When the boom has busted, prices have collapsed, vacancy rates are way up and rents have fallen even further.
That's when the property developers' get-rich-quick gulls will be discovering they're down the mine to the tune of several tens of thousands of dollars - and will be looking for someone other than themselves to blame.
That's when people like me will be pointing out that the Howard Government did much to induce them to make their foolish investments by thinking it was great policy to take negative gearing and combine it with a 50 per cent discount on capital gains tax.
Here's something to remember the next time you hear Peter Costello scoring a cheap point by noting the huge revenue gain the NSW Government has made from the property boom thanks to its stamp duty on conveyances.
About 30 per cent of the growth in conveyancing duty has effectively been diverted to other state governments because of the way the Commonwealth Grants Commission's formula for dividing the GST revenue between the states penalises NSW and Victoria.
Like all federal politicians from those states, Mr Costello believes his ambitions are best served by continuing the rip-off of his fellow state taxpayers.
Ross Gittins is the Herald's Economics Editor.
Forum
Pages: 
