It endorses Labor's plan to cut the tax discount for capital gains from 50 per cent to 25 per cent and to restrict negative gearing deductions to non-wage income. Its plan differs from Labor's in that after a phase-in period existing investors would not be exempt and nor would those who invest in new properties. Westpac Group, Adelaide Bank and major lending networks continue to pile on the pain for property buyers. Credit:Louie Douvis The Grattan report, Hot property: negative gearing and capital gains tax reform, finds negative gearing reduces home ownership rates and, by encouraging turnover, reduces renters' security of tenure. "Investors now account for more than half of new loans for housing, up from 29 per cent two decades ago," it says. "This is one reason (though by no means the only one) why rates of home ownership are falling among younger age groups." Negative gearers need to keep switching properties to stop annual rent increases eating into their tax losses. About 80 per cent of all properties bought by negatively geared investors are sold within five years, compared with an industry average of 60 per cent.

The institute says that so generous is the combination of negative gearing and capital gains tax concessions that some negative gearers are able to pay less tax in total than if they hadn't geared at all, despite making profits on their investments. "In effect, they pay no tax on their profits, despite receiving a tax bonus," it says. Perhaps perplexed by the sudden invite to connect on LinkedIn, Prime Minister Malcolm Turnbull is yet to respond. Credit:Michele Mossop Prime Minister Malcolm Turnbull said on Sunday that Labor's plan would take a "sledgehammer" to property prices by taking one-third of the buyers out of the market. But the Grattan Institute says its plan would dent prices by less than 2 per cent and scarcely affect rents. "Every time an investor sells a property to a renter, there is one less rental property, and one less renter. There is no change to the balance between supply and demand," it says. "Others may sell to another investor, but one that doesn't rely on negative gearing. Again, this doesn't reduce the number of rental properties." Although Labor's plan to restrict negative gearing to investors in new housing would make little difference to housing supply, it could be worth doing "if it appeals to intuitions that tax benefits will produce more new housing, even if theory and history suggest that the effects will be small".

The institute says Australia is almost alone, along with New Zealand, in allowing rental losses to be deducted from ordinary wage income. The United States only allows deductions against other investment income, while Britain only allows deductions against capital gains from other rental properties. Every time an investor sells a property to a renter, there is one less rental property, and one less renter. There is no change to the balance between supply and demand. John Daley, Grattan Institute The report's principal author, John Daley, said he was disappointed that the government wouldn't be changing the rules given the strength of the case for change, and also "somewhat bemused" by an example cited by the Prime Minister of a family that was negatively gearing to buy a property for their one-year-old daughter. Loading He asked: "What sort of country is it in which the only way you can expect to get into the housing market is if your parents start saving for you when you are aged one?"