Labor should steer clear of negative gearing in its quest to raise taxes

As the aim of any investment is to become cashflow positive, these deductions will not carry on indefinitely, and when the property is sold, the investor will pay tax on half the increase in the value of the property in CGT.

So the tax system heavily favours the owner-occupier, who has a lot of incentives to outbid the investor. But even so, private leveraged real estate investment is the staple of the rental market with 20 percent of Australian households owning more than one property.

But take the negative gearing away, and it will become less of a staple. This was shown back in 1985 when then-Labor Treasurer Paul Keating abolished negative gearing, only to reinstate it in 1987 after large increases in rent.

The situation now is worse than in 1985. Not only is there a dire shortage of rental properties, but this is about to be exacerbated by an immigration target of 190,000 each year, which will certainly be higher in reality as the international student market is rebooted after COVID.

At the same time, the latest housing figures show a decrease in building starts, which is likely to be made worse by the Reserve Bank of Australia's expressed intent to increase interest rates.

A pedestrian moves past the Reserve Bank of Australia (RBA) building in Sydney, Australia, on Oct. 18, 2022. (Lisa Maree Williams/Getty Images)

The public sector cannot, and will not, meet the demand. Public housing is a tiny percentage of Australia's housing stock, with 418,000 homes housing only 4.2 percent of the population and with a waiting list of 163,000.

Even if the public sector were to step up, it would face many of the same constraints the private sector faces-lack of land for building, cumbersome and slow planning processes, lack of trades, and lack of materials.

Added to that, public sector procurement and building processes are slower and less efficient than the private sector and stipulate the involvement of trade unions, further inflating costs.

In the past, opponents of negative gearing have argued that it freezes homeowners out of the market and is a drain on government finances.

Both of these arguments are wrong.