The regulators' concern is whether lending for housing has gone crazy. Credit:Louie Douvis And our regulators have a second responsibility: It's not just a matter of hosing down housing prices in two cities – they have to do it without hurting the rest of the economy. That's why the Reserve Bank can't use its monetary policy bludgeon to lift rates, why in combination with APRA and Australian Securities and Investments Commission, it's trying to use a scalpel to target investors. Together, the regulators certainly have the instruments to take a little heat out of the market, but their investor scalpel isn't very fine. There will be economic collateral damage. That's why former governor Glenn Stevens was extremely wary of using macroprudential tools. With the benefit of hindsight, he was perhaps too wary, but he was worried they would end up hurting the people you were trying to help. Demanding higher loan to valuation ratios, for example, can cool demand, but it hurts first home buyers most. Limit investor loans

The dogs are barking that more punches are likely to be thrown at investors – a tougher line on home to valuation ratios perhaps, maybe further outright rationing, telling the banks to further limit the growth of investor loans. Former governor Glenn Stevens was extremely wary of using macroprudential tools. Credit:Louie Douvis That could trim investor demand in Sydney and Melbourne but it still does nothing to improve supply and it will do no favours for real estate in the rest of the country that doesn't have a problem. There is an obvious superior tool that would have immediate impact in reducing investor demand for their preferred purchases (existing housing), encourage further supply where it's needed and help clear new stock in pockets of oversupply: limiting negative gearing to new properties. Treasurer Scott Morrison has foreshadowed the May budget will include an improved financing mechanism for social housing. Credit:Andrew Meares

Alas, purely for the sake of a political wedge, a point of differentiation and a failed election scare tactic, we're not allowed to try that. The regulators are left to struggle with inferior options thanks to the failure of our petty politics. As has been well covered, negative gearing is only one half of the tax story that has so encouraged Australia to become a nation of landlords. The other big sweetener is the way negative gearing interreacts with our 50 per cent capital gains tax discount. Claiming deductions at the top tax rate while taking profits at half of it is a key element of tax planning for the wealthy, a means to reduce their overall tax rate, undermining the progressive design of the tax system in the process. Former NSW planning minister Rob Stokes suggested curbing negative gearing for property. Credit:Brook Mitchell I'm yet to hear a rational explanation of why it's equitable to tax profits from capital at half the rate of profits from labour. A carpenter working on a house is taxed twice as much on his labour as he would be speculating on flipping an apartment bought off the plan. In the absence of any wealth or inheritance tax, the CGT bias in favour of the relatively wealthy compounds to make them (or "us", to confess an interest) steadily more wealthy and our society steadily less equal.

It turns out that the biggest factor in growing inequality is land. Now that we're reaching a tipping point in our two main cities whereby those who don't already have land may not be able to acquire it, the generosity of Australia's CGT discount is obscene. Thus reducing the discount from half to, say, a third or a quarter would have broader policy benefits while also playing a role in the investor/FHB power imbalance. And as for the extra government revenue, deficit reduction anyone? How about paying for lower company tax? But reducing the CGT discount also is locked deep in Treasury's cupboard and the Coalition's key stakeholders won't surrender the key without an almighty fight. Privileges exist to be protected. Building affordability Then there is the third superior tool not available to our regulators: actually building affordable housing. It takes time and it takes direct government involvement to overcome the private sector's understandable desire to always maximise profits, but governments' retreat from public housing has come at a cost.

Treasurer Scott Morrison has foreshadowed the May budget will include an improved financing mechanism for social housing, but odds are that it will fall a long way short of what's required to address the bigger affordability crisis. It's unlikely to even balance the diminished role states have chosen to play in public housing over recent decades. Queensland University economist Cameron Murray reckons existing government housing policy is an example of what he terms "bullshit financialisation". "That's what I'm calling a class of nonsense policies designed specifically to not address a social problem, but to rake profits from those facing the problem," he writes. "They disguise a grab for economic rents as a solution. But when you actually think about them as solutions for a specific problem, you meet irreconcilable logical errors that reveal their true nature. "If you want more housing, you build it. Instead, governments tweak the funding settings for social housing, tweak rules about town planning, buy equity in homes, and provide cash gifts to home buyers." Politicians like to concentrate on the supply side of the problem, which also is what pleases the powerful property industry, but they're not so keen to actually supply housing. It's another tool locked away in Treasury, leaving our regulators to fiddle around the edges.

If you want a big picture solution for Sydney and Melbourne, Crikey's Guy Rundle follows the Murray line on how to increase supply. "The easiest way to do this would be by substantial public-private developments on brownfield sites in the inner city, and compact and highly accessible urban hubs on the outskirts, mini-cities linked to the core city by high-speed rail. It takes a major leap of the imagination to link either of the main political parties to that scenario. Yet there are good things happening in Sydney's planning. The Greater Sydney Commission is providing the structure for – at very long last – a rational and innovative approach to Sydney's future. Medium density is becoming the default zoning for the middle ring. Regional planning and the state significant precincts are a chance to get growth right, for Sydney to be both bigger and better. But it takes time and offers no immediate solutions. The quick solutions are locked up by politics and ideologues.

Loading And there are politics in everything. Rob Stokes was the NSW planning minister responsible for the Greater Sydney Commission. He was sacked from that job in January after breaking Liberal ranks by attacking the present negative gearing policy. As Donald Trump might say, I've heard it was a direct intervention by the Prime Minister that saw him moved from the portfolio. I don't say that, but some people do.