The Turnbull Government is fending off questions about whether it will tackle tax breaks for property investors in its May Budget, after the Reserve Bank governor raised concerns the concessions were contributing to the rising cost of house prices.
While Treasurer Scott Morrison has confirmed he will attempt to address housing affordability in his second budget, he slammed the idea of "abolishing" negative gearing, which is Labor's policy.
He compared the opposition's plan to taking a "sledgehammer" to the housing market instead of a "scalpel".
"The idea that you should be focusing solely on these broad tax policies that have impacted every market and will impact it differently, you've got to be very careful about this," Mr Morrison told the ABC.
Watch: RBA Governor on house prices
In a speech on Tuesday evening, Reserve Bank Governor Philip Lowe expressed concerns about the state of the housing market, particularly in Sydney and Melbourne.
Mr Lowe warned that growth in borrowing for a home continues to exceed the income coming into homes and that banks should be more strict with their lending.
"Too many loans are still made where the borrower has the skinniest of income buffers after interest payments," Dr Lowe said.
Watch: Turnbull and Shorten on house prices
"In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong."
Labor used the last election to sell its policy to limit negative gearing to new properties only, and reduce the capital gains tax discount.
“From our point of view we would be urging the government to respond and respond in this Budget particularly in an area where they have the levers,” Shadow Small Business Minister Katy Gallagher said.
“Take the warnings and advice of the experts… increasingly the Prime Minister and the Treasurer are on their own on this.”
Prime Minister Malcolm Turnbull was asked whether his government is considering changes to the capital gains tax discount but gave little away.
"The budget is in May, we don't have long to wait," Mr Turnbull said.
“We don't have a national housing market, there are big differences between the different cities.”
Mr Turnbull said the key to addressing housing affordability is building more houses.
"We need to get more supply, more development, more dwellings being built so that supply meets demand," he said.
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