How will the federal government budget address the housing affordability problems facing many Australians? The available options are severely limited by past decisions, including those to not reduce or even limit the taxation benefits for investors and to continue to exempt owner-occupied houses of any value from both capital gains tax and the age pension assets test.

A comparison with United States tax arrangements highlights how far our system is skewed in favour of existing outright homeowners. The US allows interest payments on mortgages of up to $1 million as a personal tax deduction but restricts investors from offsetting investment losses against other taxable income. All real estate investments are subject to capital gains tax with a lifetime exemption from tax on the first $500,000 of gains on an owner-occupied home.

The government has a few options to help first-home buyers. Credit:Evgeny Atamanenko

The US system is heavily biased in favour of owners of modest properties with mortgage commitments and limits the subsidy available to geared investors. This helps keep housing prices affordable and accessible to families.

Proposals to reduce investor demand in Australia by changing capital gains tax rules or limiting the gearing benefits for new investors would do little to increase the supply of land and existing housing. Increased tax bills apply only to new buyers and reduce the incentive for existing owners to sell their properties.