The property lobby wants you to think Labor's new policy on negative gearing would lead to soaring rents and housing shortages. But the truth is very different, writes Michael Janda.

The past couple days have given insight into how Galileo must have felt when arguing that the Earth revolved around the Sun and not vice-versa.

On the weekend, Labor unveiled its policy to limit negative gearing to newly built properties from July 2017 onwards, and Treasurer Scott Morrison said the Government would consider some restriction of negative gearing.

In response, the property lobby's well-worn campaigns against such changes (modest as they are) predictably roared into life.

The problem is, like the religious zealots who refused to accept that the Earth wasn't the centre of the universe, they are demonstrably wrong.

Unlike many of the natural sciences, economics is a far less certain field.

However, there are certain economic and financial phenomena that are clearly observable, and thus some hypotheses that can be tested against observation, akin to the scientific method.

One area where this is the case is negative gearing.

The ability of property investors to deduct losses against income other than the rent they collect has existed in the tax code for decades - with the exception of a brief period in the mid-1980s when then-treasurer Paul Keating removed it.

This gives economists a unique opportunity to make observations to test their logical hypotheses against.

Myth 1: Rents will soar

One key observation, made notably by respected independent economist Saul Eslake, is that the removal of negative gearing in the mid-1980s did not increase rents.

After conducting its own extensive research, ABC Fact Check reached the same conclusion.

Those analyses completely undercut the property industry's primary claim that removing negative gearing would hurt tenants more than landlords by pushing rents higher.

Myth 2: Housing construction will dive

Another popular claim made by the property sector is that removing negative gearing will reduce housing construction, leading to an even worse housing shortage, and thus do nothing for affordability.

Aside from the fact that Labor's policy maintains the negative gearing deduction for newly built homes, thus actually incentivising investors to buy new dwellings over old, there is strong evidence that negative gearing has done precious little to add to housing supply.

The latest housing finance figures from the Bureau of Statistics show that less than 10 per cent of investor loans went to people planning to build or buy newly built dwellings.

That was despite December having the second largest amount of lending approved for investors constructing new dwellings on record.

In November, less than 8 per cent of investors were borrowing to build new homes.

That is a pretty poor return in new home construction for a policy estimated to cost the federal budget at least $2 billion annually.

It also means that negative gearing is simply giving investors a leg-up to outbid owner-occupiers for existing dwellings, pushing up the general level of home prices.

Myth 3: 'Mum and dad' investors will be the main losers

The other big property lobby furphy is that negative gearing is mainly used by average-income 'mum and dad' households.

The Housing Industry Association, other property lobby groups and the occasional politician cite Tax Office figures showing that nearly three-quarters of property investors earn under $80,000 a year.

I debunked that claim in an article for The Drum in 2014 and The Conversation came to a similar conclusion more recently.

However, this falsehood refuses to die.

In a nutshell, the property lobby's claim is based on Tax Office figures that look at income after deductions - such as losses on negatively geared properties - are made.

Thus, someone who appears to earn $80,000 may be earning much more but booking tens of thousands of dollars in investment property losses to reduce their taxable income.

A far more accurate representation of who utilises negative gearing the most is provided by the long-running survey of Household Income and Labour Dynamics, HILDA.

That survey shows that housing loans are twice as common among the top 20 per cent of income earners than any other income group.

It also shows that the top fifth of income earning households hold 60 per cent of investment property debt.

Bearing in mind that housing debt is basically a prerequisite to negative gearing, it is no surprise that the National Centre for Social and Economic Modelling (NATSEM) estimates that 34 per cent of negative gearing benefits go to the top 10 per cent of income earners.

How does Labor's policy stack up?

So the property industry's claims don't stand up to analysis. How about Labor's policy?

Economically, it's not perfect. Retaining negative gearing on newly built properties has the benefit of encouraging more investment in new housing supply, which should put downward pressure on prices.

However, this benefit could become an economic negative if, contrary to mainstream analysis, Australia already has a balanced supply or even oversupply, as I have previously argued.

An oversupply, in the current circumstance where Australian households are saddled with record debt, could lead to an Irish or Spanish-style property market collapse.

By grandfathering existing investment properties from the abolition of negative gearing, Labor's policy will also tend to distort the real estate market by giving current investors an incentive not to sell.

The desire to avoid 'retrospectivity' means that younger people will be denied the tax breaks that many older people who already own one or more investment properties will get to keep until they sell them.

The perceived, and probably real, political necessity of avoiding so-called retrospectivity and protecting baby boomer tax lurks is a burden that younger generations are also likely to face in the event of any major changes by either major party to superannuation.

However, we don't live in an economically perfect world, and Labor's policy proposal is a viable and potentially saleable way to phase out the worst aspects and effects of negative gearing without spooking current investors and crashing the property market.

In particular, the halving of the capital gains tax discount to 25 per cent should significantly lessen the use of negative gearing as a tax minimisation tool.

It is also a highly progressive measure, with an estimated 73 per cent of the $6.15 billion benefit from this tax break going to the top 10 per cent of income earners.

The Treasurer is expected to deliver a counter-proposal to Labor's negative gearing policy in a Press Club speech on Wednesday.

Over to you, Mr Morrison.

Michael Janda is an online business reporter with the ABC.