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Negative gearing .pdf

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Rents are unlikely to rise if negative gearing is changed because landlords
cannot pass on cost increases independently of the balance between demand
and supply in the rental housing market, economist Saul Eslake said.
Experts in the property industry are concerned limiting negative gearing only
to new properties would jack up rents as housing investors leave the market
reducing the supply of rental properties or raise rents to make up for the
higher cost of investment.
"Landlords cannot arbitrarily change their costs. Are interest rates changes
passed onto tenants?" Mr Eslake said.
"Landlords will charge what the market bears…they will raise rent if the
market is tight and drop rents when it is loose."

Rental market in Australia
Nationally, rental growth has dropped over the past 12 months and the current

rental markets are the weakest since 1996, according to Corelogic RP Data.
On Tuesday, SQM Research's new rental data for January showed the
vacancy rate is 2.5 per cent with rents falling in Perth and Darwin and minimal
rises in the major cities of Sydney and Melbourne.
A tight market is when vacancies fall under 2 per cent, SQM Research chief
executive Louis Christopher said.
"At the moment, the rates are more at equilibrium. Hobart and Canberra are
picking up pace, particularly in Canberra where conditions have been soft," he
"The main cities of Sydney, Brisbane, we see relatively slow rental growth."
Mr Christopher agreed with Mr Eslake that landlords still have to adhere to the
supply and demand levers of a wider rental market.
"The bottom line is the rental market is a market. It is determined by supply
and demand. A landlord can try to pass on increases but in a market which
favours tenants, they are at a severe risk of losing tenants and having
the property vacant."
The property industry disagreed saying the stable rental condition would turn
on its head if the Labor Party's proposal to reduce negative gearing benefits
goes through.
"Greater stability in rents has been a welcome relief to tenants, for so long
subjected to hike after hike, yet Labor's policy could potentially reverse the
situation and exacerbate renters' pain all over again," property
agent Laing+Simmons managing director Leanne Pilkington said.
Ms Pilkington said prices of new housing would rise further as investors chase
new stock where negative gearing is allowed. The ability of current tenants to
buy a home would deplete, forcing them to demand more rental properties.
"This could lead to a scenario where vacancy rates drop even further, on top
of the most recent tightening trend, putting renewed pressure on rents and
jeopardising the ability of tenants to accumulate a deposit for their first home,"
she said.

But negative gearing removes one of the greatest concern in the housing
market, speculation, which forces housing prices up. "Now, renters have a
better chance of buying home [when prices comes down]," Mr Eslake said.
Importantly there are too many "moving parts" to determine how rents will shift
if negative gearing changes. The limitation of negative gearing to new
properties - allowing investors to offset losses only for new properties against
their income - could make it too expensive for future investors thus limiting
supply of rental properties, the Housing Industry Association said.
Or, it could lead to a strong supply side response to the market, SQM
Research said. "We have seen such directed stimulus work on the markets
before, namely in the form of various first home owner grants, so we are
confident, the market is responsive to such stimulus."
"It is hard to predict how the policy change will affect rents," AMP Capital
Investors chief economist Shane Oliver said.
"I think there will probably be upwards pressure on rents but there are many
offsetting factors."

Mr Oliver said even if landlords decide to pass on increased costs of property
investments, there might be a lag before the effect is seen in rents.
"It might take a while to show up. Remember you can still negatively gear
[grandfathered assets] and...new investors can do that in new properties
which will increase supply of housing."

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