The McKell proposal, contained in the Switching Gears report, is designed to drive the creation of new housing and deliver a $29.3 billion benefit to the budget bottom line over a decade. It would be grandfathered so existing investors were not hit and is being looked upon favourably within Labor's shadow ministry. Prime Minister Tony Abbott says negative gearing helps keep rent charges down. Credit:Gene Ramirez Amid mounting debate about housing affordability and the booming Sydney property market, which has been described by Reserve Bank Governor Glenn Stevens as "crazy", Mr Abbott told radio station 2GB on Thursday that government policies should never make things harder for property buyers. "This is why I am so concerned about the Labor Party's apparent attempts to dabble with negative gearing because if you muck around with negative gearing effectively you have put rents up," he said. "If you look at what the Labor Party is proposing at the moment they want to hit your super with more tax, they apparently want to drive down the value of your existing home and now it seems they want to put rent up by fiddling with negative gearing."

The warning came as Labor wants to attack housing affordability by curbing tax breaks for investors but shadow treasurer Chris Bowen says Labor isn't ready to announce new policies on capital gains tax and negative gearing just yet. Credit:Sean Davey "We have specifically said it would be irresponsible to say that we would not take any particular changes [to negative gearing] to the next election, but we will have two principles – one, that we would not disadvantage existing investors who have made investments in good faith and secondly, that we would look very closely at impact on housing supply," he said. "We will take to the election very carefully calibrated policies, we have already announced some ... [but] you don't write these things on the back of an envelope and just announce them because it's a topical issue today, we have been working on our policy development for months." On possible changes to the capital gains tax rules, Mr Bowen said the issue was in the "same category" as changes to negative gearing.

"There is a very close interaction here between negative gearing and capital gains tax, they interact very strongly, hence us taking a holistic view," he said. Negative gearing allows investors to buy an asset and write down the interest costs against other income, while capital gains tax is the tax paid on the profit made from the sale of an asset, such as a house or shares. If a person has owned the asset for more than 12 months, tax will be paid on 50 per cent of the capital gain, a change introduced by the Howard government in 1999 that, according to some economists, has helped drive the boom in property investment in Australia and a shortage in affordable housing. The proposal has also been praised by Bank of America Merrill Lynch economist Saul Eslake, suggested the McKell proposal was a reasonable compromise that would go some way towards winding back negative gearing tax breaks. Mr Eslake, a long-time critic of negative gearing, said that in an ideal world, he would like to see negative gearing scrapped all together.

"But 15 per cent of the population have their snouts in that trough and no government could afford to alienate that many people," he said. "I hate grandfathering, but if it is the compromise you have to make in order to make some progress in getting rid of negative gearing then I'll make it." On capital gains tax changes, Mr Eslake suggested it was unreasonable that "income from speculating [in the property market] should be taxed at a lower rate than income from working". Deloitte Access Economics director Chris Richardson saidnegative gearing was not the root cause of the housing affordability problem. "If you are fixing negative gearing you are fixing a symptom, the deeper cause lies with the size of the capital gains tax discount," he said.

"If you actually want to solve the problem then you would do something about capital gains." Loading There were about 1.9 million property investors in Australia in 2010-11, with 1.26 million negatively geared, which costs the government an estimated $2.4 billion annually according to the McKell Institute. Follow James Massola on Facebook