HIA Chief Economist Tim Reardon said the housing debate continues to focus too heavily on changing who owns homes rather than increasing the number of homes being built.

“Australia’s housing affordability problem is fundamentally a shortage of homes compared to the number of households,” said Mr Reardon.

“We have more households requiring accommodation than we have homes available, and each year demand continues to grow faster than supply, leading to higher home prices and rental shortages.

“Policies that increase the cost or risk of investing in housing do not resolve that shortage.

He said that proposals to redirect investor activity to new homes by limiting negative gearing sounds appealing, but is likely to make the problem worse.

“If policy settings reduce investor participation overall, fewer new homes will be built, rental supply tightens further, and the structural shortage worsens. This in turn will see increased investor participation in the established market, and higher rents.

“Investors aren’t making the decision to invest in new, or established homes. They can also redirect investment to shares or other opportunities. This will likely lead to less investment in housing, and therefore less investment in new home building.

“The reduction in supply that follows will see rising rental prices, rising home prices as the disequilibrium continues to deteriorate, but at a faster pace.

Mr Reardon pointed to recent economic modelling by Qaive and Tulipwood Economics which found that restricting negative gearing to newly constructed dwellings would reduce dwelling commencements by around 22,700 homes over five years, reduce GDP, lower construction employment, and increase rents.

“We cannot tax our way to increased housing supply.

Mr Reardon also warned that restricting negative gearing may also worsen equity outcomes.

“Negative gearing is predominantly used by younger and more highly leveraged investors, not long established investors, institutional investors or those with property trusts,” he said.

“Established investors, institutional investors and those with large housing portfolios are not likely to be impacted by limiting negative gearing, as they have alternative incomes to offset.

“Policies that restrict negative gearing to only two or three properties, or to new only, will not change the investment decisions of institutional investors or those with long held homes who are positively geared across their portfolio.

“These policies would add to the complexity and distortions in the housing market and lead to less efficient outcomes, and fewer homes.

Mr Reardon also noted that an increase in revenue to government has been overstated.

“The net outcome is largely a change in when the government receives revenue, not a change in the quantum of revenue.

“We have tried this before. In 1985 negative gearing was removed and because losses could be carried forward against future rental profits and capital gains, it resulted in more revenue initially, but less revenue in future years.

“Negative gearing was re-instated two years later. New Zealand also abolished negative gearing, briefly, from 2022.”

Mr Reardon said Australia’s housing affordability challenges are real and the disagreement over the solutions has seen policy progress stagnate.

“The long term solution remains increasing housing supply relative to demand. This means lowering the cost of delivering a new home to market, not increasing taxes to further distort the market.

“Declining home ownership rates, rising rents, increased investor activity and intergenerational inequity are symptoms of undersupply, not the cause,” he said.

“Housing affordability improves when the supply of homes grows faster than demand.

“The solution to a shortage of homes is more homes. With time, increasing the supply of homes will stop home prices and rental prices rising, and investors will leave the housing market for other sectors.

“The goal should be to facilitate a better functioning market for housing with less government distortions, not creating additional distortions.”

“The Henry Tax Review advised against increasing the taxes on investors until the supply problem is resolved. This advice remains valid.”

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