The housing market needs a long-term plan and a review of negative gearing

It's time to look at the facts about negative gearing and the housing market. These are facts that perhaps Labor's Shadow Treasurer realised too, when he once said it is time negative gearing was subject to rigorous review.

It is a tax concession that costs more than $2 billion a year in lost revenue, more than $1.2 billion of that on rental properties alone.

It has contributed to distorted investment patterns, badly targeted housing investment, speculative overheating in the property market, high house prices and excessive rental costs.

It plays its part in contributing to high interest rates, high private-sector debt and our large current account deficit. As an investment activity it is driven by tax-levered debt, tax minimisation, capital gains arbitrage and profiteering.

Dreaming of big capital gains and various gearing schemes have fed over-investment in new units in our high-priced inner city markets and ignored the real need for affordable rental housing.

On the positive side negative gearing has contributed to jobs and activity in the residential construction sector, has grown our housing stock overall and is a profitable pursuit for large numbers of Australians. Residential housing contributes about three per cent to the economy.

The policy challenge is that tightening or prohibiting negative gearing will have to be adjusted for by other better-targeted policy measures, to avoid a hard landing. And it must affect investors prospectively, not retrospectively.

Capital gains tax, the First Home Owners Grant, stamp duties, how to provide for low-income housing stock and an affordable housing policy, all have to be part of the review.

Negative gearing is a practice severely constrained or banned in the Unites States, Canada and the United Kingdom, and elsewhere in the developed world, (although many of these countries do provide tax relief on home mortgages, which Australia does not).

Crean's reaction to suggested review of the negative gearing regime was instinctive - to curl himself up in to a small ball and wish it would all go away. Costello's reaction was equally instinctive - to drive in a political wedge. But it can't go on - the policy must be reviewed, otherwise when (as is widely expected) the housing bubble bursts, there will be a reckoning.

The Reserve Bank of Australia is stuck between a rock and a hard place. RBA Governor Ian Macfarlane wants to take the pressure off the Australian dollar and exports but can't afford to give the beast that is the housing market even the slightest bit of slack.

Growth in housing prices is well above CPI and the market is seemingly irrepressible - 20.9 per cent growth in Sydney housing prices in the last year, 18 per cent growth nationally.

Home ownership is falling. It is harder than ever for younger or poorer Australians to become homeowners.

More than 60 per cent of renters on low or moderate incomes pay unaffordable rents (more than 30 per cent of their income). There is dwindling supply of low-cost housing.

Negative gearing has forced us into a highly variable and unresponsive housing market. In other countries there is a stronger positive relationship between capital value and rental returns than in Australia.

In Australian capitals and main regional cities it is not possible to get a positive return on investment without negative gearing at the highest marginal tax rate - even with strong capital growth. That means that companies paying 30 per cent tax cannot possibly make residential housing work as an investment.

We need to construct a different, less volatile housing market and one that does not result in prices beyond the reach of most Australians.

Key workers - nurses, train drivers and service industry workers - are already saying that it is too expensive to live in Sydney. Our largest city will not be viable if we cannot house key workers. That's a reality that has to be faced and which government cannot afford to ignore.

The Australian Democrats would like to see a housing market that tames the beast while still providing investment opportunities for Australian investors, one that maintains affordability across the board, and a supply of new housing that is sufficient to meet demand.

A mix of investment subsidies that are targeted specifically to affordable rental including additional investment in new types of public and community rental housing could address the significant failings in our private rental markets.

A national housing plan that sets realistic social and economic goals within a long time frame is required and a review of negative gearing should rightly and properly be a part of that. The question is - are the government or the opposition ever going to be brave enough to take on the challenge?