Federal Treasurer Scott Morrison says the government wants to make housing more affordable without causing a crash in the value of existing homes.
He used a speech in Melbourne to rule out scaling back negative gearing tax breaks on investment properties, saying that would be bad news for small investors, and drive rental prices higher.
"It is an undisputable fact that it is an established and structural component of Australia's housing market. It is. It exists. And disrupting negative gearing on the scale that has been proposed by many would not come without a cost, especially to renters. Let alone the wider economic impacts. And proponents of disruptive, large-scale changes to negative gearing, I think, have glossed over this fact."
House prices are affected by supply - the rate at which new houses are built - and demand from buyers, including investors.
Mr Morrison says Australia's problem is on the supply side.
He says planning delays, access to land and excessive regulation are hurting the supply of houses, and driving prices up.
But Labor says there's a problem with demand, too, with negative gearing driving unsustainable investment in property.
Chris Bowen is Labor's treasury spokesman.
"His speech is nothing short of a disgrace. It's a sellout to all Australians, particularly young Australians, trying to get into the housing market. Now, today in this speech in which Scott Morrison will share with us his thoughts, most notably higher house prices are making it tougher for potential house home buyers to transition into ownership - he has worked out high house prices are the problem. That's his big contribution."
Some housing experts agree that reforms to negative gearing should be on the table.
Mr Morrison used his speech to point out 58,000 teachers and one-in-five police officers benefit from negative gearing.
But professor Peter Phibbs, an economist and planner at the University of Sydney, says that doesn't tell the whole story.
"So even though policemen and nurses are in the mix, the majority of the subsidy is going to people on higher incomes, and that is a concern. But it almost doesn't matter who is receiving the subsidy -- the subsidy is running so hot in terms of impacting on demand that it's really hurting everyone that's trying to get into the market, including lots of policemen and nurses."
The Turnbull Government has hinted that housing affordability will be a central focus of next month's Budget.
The Treasurer has suggested the government is looking into a new tax on empty houses owned by foreign investors, and making it easier for pensioners to downsize by removing tax penalties.
He's flagged a plan to encourage institutions, particularly superannuation funds, to invest in affordable housing for low-income Australians.
"There is a clear appetite, I think, for this from pension funds, particularly in the United States and Canada. And I would hope a similar appetite could be cultivated, and I believe it does exist, with Australian institutional funds, particularly super funds. In fact our funds are already investing in similar types of investments in the United Kingdom right now. What could be more in the interests of nurses, teachers or police pension fund members than investing in affordable hosing for nurses, teachers and police officers?"
Mr Phibbs, the economist, says the super fund idea has merit.
But with rental returns sitting at a low 2 per cent per year in Sydney and Melbourne, he says the government will likely need to sweeten the deal for institutional investors.
"Superannuation funds are looking to make more than a 2 per cent return on their investment. So it's a matter of trying to be I think a bit creative about how we can do that. But at some stage of that process we probably are going to need some sort of government support to really make that deal stack up."
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