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Negative Gearing Effect on Rent in Sydney

Negative Gearing

Housing affordability in Sydney has been a hot topic of late, and as usual, negative gearing comes under fire for decreasing housing affordability. What is negative gearing? If an investor makes a loss on their investment, they can deduct it from their non-investment income on their tax return. With relation to property, this usually means that if rental income is less than mortgage interest, the owner can deduct the loss from their wages before calculating tax.

Effect on Rent

The theory is that offering this tax incentive results in a bigger supply of investment properties and therefore lower rents. The counter-theory is that investors outbid owner-occupiers who stay as renters increasing the demand and therefore higher rents.

in Sydney

In Australia, negative gearing was introduced in 1985, limited in July 1985, and restored in September 1987. Let's see what impact this had on rents around that time. In the interactive charts below, you can see the increase in the rental index numbers for Sydney and Australia. It's clear that Sydney outpaced the rest of Australia during this time, but whether the introduction of negative gearing had an effect (and what that effect was) I leave to you to decide. Contact us if you want a different visualisation of this data.

I have taken the index numbers from ABS release 6401.0 - Consumer Price Index, Australia, Dec 2014 (latest issue) TABLE 11. CPI: Group, Sub-group and Expenditure Class, Index Numbers by Capital City and I reindex them based on the viewing window for easier comparison. (The original index reference period was of the financial year 2011/12 = 100.0.)

The chart below shows the year-to-year change in the index. This information is available in TABLE 12. CPI: Group, Sub-group and Expenditure Class, Percentage change from corresponding quarter of previous year by Capital City, but I have calculated it from TABLE 11.

The chart below shows the difference of the rent index change and the "All groups excluding Housing" index change. This lets us see rent increases aligned with the rest of CPI. Here I have smoothed it for the change from the corresponding quarter of two years earlier.

I've also added some shading so you can see the corresponding time period of some financial policy changes.