Millions of people have been locked out of the housing market. Credit:Louie Douvis But for political reasons, the Coalition government refuses to act on what is a major economic risk for the country and a huge social issue for the millions – a whole generation – that have been locked out of the housing market. In refusing to engage in any of the difficult work to solve this issue, the government has also placed a straitjacket on the Reserve Bank of Australia, which, despite the sluggish economy, underemployment and next-to-no wages growth, cannot lower interest rates. Labor supports restricting negative gearing for new investors to new homes only and cutting the capital gains tax (CGT) concession to 25 per cent for investors who hold the asset for at least a year. The Coalition is opposed outright to touching negative gearing but is said to have been looking at CGT options as part of the housing affordability package for the May budget.

Prime Minister Malcolm Turnbull has steadfastly refused to address the need to act on negative gearing, choosing instead to blame the housing bubble on a lack of supply. Credit:Paul Jeffers Figures produced on Monday by CoreLogic show that in Sydney and Melbourne residential property prices have gone up 19 per cent and 16 per cent respectively over the past year, and growth across all capital cities is at a seven-year high. These price rises have only fuelled further gains as buyers become more desperate and investors eye even bigger profits. Of the limited amount of residential stock – particularly in houses – investors now make up about 50 per cent of buyers. To eliminate or wind back negative gearing tax breaks on housing would affect only investors – which would perfectly target the problem.

To eliminate or wind back negative gearing tax breaks on housing would affect only investors - which would perfectly target the problem. Everyone else seems to appreciate the risks associated with this runaway train. The banking regulator, the Australian Prudential Regulation Authority, last week announced a raft of measures to discourage excessive lending to investors, central to which was increased scrutiny on the number of interest-only loans. APRA chairman Wayne Byres cited the need for banks to recognise the "heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions". The corporate regulator, the Australian Securities and Investments Commission, chimed in on Monday with greater surveillance of banks and mortgage brokers to ensure they were engaging in responsible lending and that customers had the ability to service the interest rates on their loans.

Even the banks have been responding to the increased risk by pushing up interest rates on most types of residential mortgages – including investor loans, interest-only loans and, in recent weeks, owner-occupier loans (interest-only and principal and interest). Last week's move by APRA will be its second attempt in about 2½ years to hose down risk associated with the rising property market. It first acted late in 2014 when it placed a cap of 10 per cent on banks' growth in lending to investors. The response was to slow the market for about six months to 12 months, after which it began to take off again. The RBA cut interest rates twice in 2016 – in May and August – after its then-governor, Glenn Stevens, said in a statement that "the likelihood of lower interest rates exacerbating risks in the housing market has diminished". Clearly it made the wrong call on the housing market but arguably had little choice but to address the prospect of deflation. Prime Minister Malcolm Turnbull has steadfastly refused to address the need to act on negative gearing, choosing instead to blame the housing bubble on a lack of supply.