House prices won't fall if negative gearing restricted: economists

House prices won't fall if negative gearing is restricted to new properties and the capital gains discount halved, a majority of economists say.

Three-quarters of 50 economists polled by the Labor-aligned McKell Institute said house prices would continue to grow over the long term under Labor's proposal, assuming no other changes to broader market trends.

Former Reserve Bank governor Bernie Fraser, who took part in the survey, slammed current housing tax arrangements as "manifestly unfair", saying they scored poorly on the four goals of taxation: efficient resource allocation, economic growth, price stability and fairness.

"The current negative gearing (and related capital gains) tax arrangements... divert savings and resources away from potentially more productive investments into (sometimes speculative) property investments to take advantage of the tax concessions," Mr Fraser said in a statement.

"This does nothing to improve economic growth (or the budget bottom line)," he wrote. Furthermore, tax incentives for investing in housing "can accentuate short term fluctuations in house prices and sustain long term increases in house prices which far outstrip increases in the earnings of most Australians".

"This last-mentioned consequence, plus the fact that the benefits of the concessions flow disproportionately to people on higher incomes, make the current measures manifestly unfair."

Of the economists surveyed, 54 per cent agreed house prices would continue rising, and a further 24 per cent strongly agreed. The Prime Minister, Malcolm Turnbull, has accused Labor of putting a "wrecking ball" through housing investment with its policy to restrict negative gearing to new properties and halve the capital gains tax on investment properties from July 2017.

The government has been considering its own crackdown on "excessive" negative gearing, but senior government sources have told The Australian Financial Review that a proposal to cap deductions at $20,000 a year had been assessed but rejected.

Treasurer Scott Morrison this morning used the findings of a BIS Shrapnel report to claim Labor's policy would push up rents and reduce economic growth. The report found Sydney apartment rents would be $40 higher in 2026 if negative gearing were limited, because landlords would pass on in full to tenants the value of the lost tax concession.

But an associate director at BIS Shrapnel, Kim Hawtrey, has told ABC Radio that the modelling was undertaken last year, at the request of a private client, and was not an evaluation of Labor's policy proposal. It does not, for example, include the impact of halving the capital gains tax concession.

The chief executive of the Grattan Institute, John Daley, said some of the assumptions in the report didn't pass the "giggle test".

The McKell Institute survey also found 90 per cent of economists surveyed agreed that current housing tax arrangements lead to an inefficient allocation of resources in the economy.

A similar 92 per cent said the majority of the benefits of the concessions went to those with above-average wealth.

Asked whether the Hawke government's move to curb negative gearing in the mid 1980s had pushed up rents, 47 per cent disagreed and 19 per cent remained uncertain.

Two-thirds of economists said investors would continue to invest in existing housing, even if negative gearing was removed.

SMH / Date March 3, 2016