It's better to trim your sails than suffer mortgage stress or worse, a distressed sale. Credit:Louise Kennerley "People will talk about how the cost of housing is affecting modern families," Elliot said. "Twenty or thirty years ago you didn't have to move that far from your parents or the wider family but now you'll get people talking about how their kids will have to move to another city. It's about the breaking up of the family structure." The anxiety is hardly surprising; last year house prices rose by 11 per cent in Australia but wages grew by only about 2 per cent. A generational dimension has also emerged in the politics of housing because most of those benefiting from generous tax breaks on investment housing are older people. Meanwhile, the rate of home ownership among younger Australians has declined as property price gains, fuelled by investor demand, far outstrip wages growth. This week, Labor leader Bill Shorten pushed housing policy centre stage when he ended decades of bipartisan consensus on negative gearing. At the moment, negative gearing allows property investors to deduct net rental losses against their wage income. They are also entitled to a capital gains tax discount of 50 per cent once the property is sold. But Labor plans to limit negative gearing to the purchase of newly built housing only and to reduce the capital gains tax discount to 25 per cent. Shadow Treasurer Chris Bowen says the changes will add $32 billion to the budget bottom line over the next decade.

Illustration: Richard Giliberto Labor's policy carefully exempts the 1.2 million taxpayers who now claim deductions. Only investments made after July 1, 2017, will be affected by the change. Negative gearing has become a hugely popular pastime in middle Australia since the capital gains tax discount was introduced by the Howard government in 1999. But the combination of the two has been blamed for encouraging property speculation at the expense of first-home buyers. So would Labor's changes make housing more affordable? Yes, says the Grattan Institute's John Daley, who has researched the effects of negative gearing and capital gains tax discounts. "You are changing the returns on after-tax returns on housing for investors but not changing anything for occupiers," he said. "Imagine yourself at an auction. The owner-occupier has exactly the same incentive to buy the house as they do now but the investor will not want to pay quite as much as they did previously because the after tax return is now lower." That means lower demand with no material change in supply and as a result prices will be lower than they would otherwise have been. Saul Eslake, an independent economist and leading thinker on Australian housing policy, says the federal government has no better option to limit upward pressure on house prices than reforms to negative gearing and the capital gains tax discount.

A generational dimension has emerged in the politics of housing because most of those benefiting from generous tax breaks on investment housing are older people. "Given the levers at the federal government's disposal, I can't think of anything that would be more helpful to improving housing affordability than some significant changes to negative gearing arrangements," he said. "I say that because I think the overwhelming impact of negative gearing on the housing market is to push up the price of established dwellings." More than 90 per cent of lending to housing investors is used to purchase established dwellings. Eslake, a long-term critic of negative gearing, says the losers under the current policy settings have been first timers unable to compete with investors who "have their mortgage costs subsidised by tax payers though the negative gearing arrangements." As a result, Labor's changes would "remove a source of upward pressure on existing home prices." Eslake also dismissed claims by the property industry that rents will rise if negative gearing and the capital gains tax discount are changed. If landlords were to respond to changes in negative gearing by withdrawing from the housing market that would push down the prices of properties, making them more affordable to would-be home buyers, allowing more of them to become home-owners. In turn that would reduce demand for rental properties.

While changing negative gearing and capital gains tax is "no magic bullet" for Australia's housing affordability challenges Daley says Labor's proposal would be a substantial improvement on current policy settings. "Over time, it will have a big impact on the budget, it will increase home ownership and it will reduce the inequity of the Australian tax system," he said. Labor's plan been backed by former Liberal premier of Victoria, Jeff Kennett, and several prominent business figures have publicly criticised negative gearing since the policy's release. Deloitte Access Economics budget expert, Chris Richardson, takes a slightly different view to Daley and Eslake. He would prefer negative gearing to be left unchanged and only the capital gains tax discount reduced. "If you fix the capital gains tax discount you don't really have to do anything on negative gearing," Richardson said.

But like Daley and Eslake he does not think Labor's plan would cause the damage predicted by critics. "I don't see it as a major force for either good or evil," he said. Bowen predicted Labor's plan to change negative gearing and capital gains tax would draw fire "from groups which benefit from the current arrangements" and sure enough the government and groups representing the property sector have condemned Labor's policy. Property Council of Australia chief executive Ken Morrison called it a "risky intervention in housing markets" at a time when prices are coming off the boil.

"The halving of the capital gains tax discount will be bad for new housing supply, even with their negative gearing changes," he warned soon after Labor's announcement. "You can't increase taxes on housing by $32 billion and not affect rents, housing construction or prices." Graham Wolfe, of the Housing Industry Association, said reducing the capital gains tax discount "will push investment away from Australia's housing sector". In a blistering political attack on the opposition's policy on Friday, Prime Minister Turnbull warned "Bill Shorten's policy is calculated to reduce the value of your home". The government is mulling over its own potential changes to negative gearing and capital gains tax discounts. One option under consideration is to cap the number of properties that an investor can negatively gear. Another is to limit the annual tax deductions that can be claimed.

But Treasury is understood to be pushing for negative gearing rules to be left unchanged and only the capital gains tax discount reduced. "If they wanted to be really, really clever they could go hard on capital gains tax and then beat the ALP over the head on negative gearing, knowing full well that by going hard on capital gains tax you will make negative gearing less attractive anyhow," Daley said. Whatever the government decides, housing policy now looks set to be a battleground in this year's general election. That poses some intriguing questions. Could anxiety over the cost of housing be a vote changer for young people? And what's more important to the army of older investors – tax breaks for themselves or more affordable housing for their young?