Monday, 15 March 2010

More on incidence and elasticities

Last week, the Property Investors' Federation got a lot of press arguing that tightening up depreciation on rental properties would push rents up considerably; I suggested that unlikely as supply is almost certainly less elastic downwards than is demand, in which case supply bears the burden of the tax.

I'm sure I had the Coleman and Scobie paper floating around in the back of my head when I posted; Andrew Coleman helpfully sends me his work for Motu and Treasury showing that indeed rents are unlikely to change much. He there found that a ten percent increase in the tax concession to landlords would result in a 0.3 percent decrease in rents in the short term assuming that supply of rental housing with respect to rents (and other returns) is unitary and demand for rental housing with respect to rent is -2.

In short, it's unlikely that rental prices would move much if landlords could no longer write off depreciation. We might expect some transitional difficulties as landlords under money strain let properties fall into disrepair before selling them on, but equilibrium would return with lower house prices.

I'm still pretty surprised that the media just took the lobbyists' numbers on this one. Of course, we shouldn't just dismiss findings because of source, but it does suggest our antennae should be up....

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