A better approach:
Australia's current system of negative gearing is a key factor behind the housing affordability problem in Australia. It has encouraged a flood of investors into the established housing market, it has not contributed to housing supply or rental availability or affordability, and it costs the Government billions of dollars of foregone tax revenue each year. Housing affordability will never be properly addressed in Australia until significant changes are made to negative gearing.
Negative gearing's cost to the Government and impact on house prices would be greatly reduced if, from a certain date in the future, it was retained on newly constructed dwellings but abolished where an investor purchases an existing ('second hand') dwelling. In this way, pre-existing investment property owners would not be disadvantaged and, over time, tax deductible interest would begin to fulfil its economic purpose of encouraging real investment - the production of new housing supply - as new investors enter the housing market. Such an approach, once understood, would likely be supported by the home building and property development industry because it promotes higher building levels. Further, the increased housing supply would be likely to increase the availability of rental properties and lower rents. Of course, those groups with a direct interest in long-term house price appreciation would strongly object to such an approach including, perhaps, many current Australian home owners who (wrongly) perceive that their wealth is increased when their home value rises.
Tax purists might also disagree with such a change to negative gearing on the basis that it is wrong to discriminate among financial assets. My response is that housing is an entirely different type of asset from other financial assets, like shares. Firstly, housing is a social asset and shelter is a basic human need. Second, those buying other financial assets are bidding against other investors that can also access interest deductibility. However, with housing, the main other bidders are owner-occupiers that do not have access to this advantage (interest deductibility). So we are not comparing 'apples with apples' with regards to housing versus other financial assets.
