When Bill Shorten announced Labor would target negative gearing and the capital gains discount for property investors if it wins the next federal election, the industry and the federal government united in outrage.

In September, Prime Minister Scott Morrison said the planned changes would torpedo the housing market.

“If you now take the sledgehammer of negative gearing and capital gains tax changes, if you abolish negative gearing as we know it, then you’re inviting a housing market crash,” he said. “And that’s good for nobody.”

Labor’s plan – if it wins government – is to limit negative gearing to new rental dwellings and halve the capital-gains tax discount for property investors (from the current 50 per cent to 25 per cent). The change would be limited to purchases made after a yet-to-be announced date.

Despite the outrage, Treasury modelling released earlier in 2018 shows the effect on prices will be modest.

Under Labor, you’ll pay too much tax. pic.twitter.com/MM9vACle5V

— Scott Morrison (@ScoMo30) October 7, 2018

But the government has trumpeted the concerns of real estate agents and property lobby groups, which claim the rollbacks will decimate property prices, and be particularly hard on “mum and dad” landlords.

This is despite the Treasury report finding that 50 per cent of the benefits of negative gearing go to the top 20 per cent of income earners. The top 10 per cent of income earners receive nearly 75 per cent of the CGT discount benefits.

Independent economist Saul Eslake said the property industry’s claims were little more than scare tactics.

He dismissed the property lobby’s idea that tinkering with the tax settings would lead to a mass exit of landlords, and a dramatic rise in rents. When the Hawke government abolished negative gearing in the ’80s, nationwide rents didn’t rise much at all, an ABC fact check showed.

“Suppose it were true, though, and landlords sell their properties en masse: they’re not going to sell to other investors,” he said.

“They’ll be selling to first-home buyers and owner-occupiers, who will then no longer be renting.”

University of Tasmania housing expert Keith Jacobs echoed Mr Eslake’s frustration.

“The Property Council, Housing Industry Associations and real estate agents all like negative gearing because, in a sense, it boosts their profits. It’s essentially a subsidy for landlords and enables them to compete in the housing market, and pushes up prices,” he said.

“It really is very, very irritating, because quite honestly, it’s taxpayers’ money that’s literally going to landlords and investors.”

Professor Jacobs said negative gearing was a “crazy government [policy] that really should have gone away a long, long time ago”.

“It’s a big myth to make out that all of these people will be badly affected. It doesn’t make any sense,” he said.

“All it does is crowd out owner-occupiers and encourage speculation –money that could be invested in more productive capital rather than housing.”

How Australia stacks up internationally

Skewed housing tax and policy settings were to blame for much of Australia’s housing predicament, UNSW City Futures Research Centre academic Chris Martin said.

“Our tax system has been a really powerful shaper of our present housing problems, which are rising house prices, rising debt, and falling owner-occupation,” Dr Martin said.

Nearly a third of Australians rent, and owner-occupation is falling in all age groups (except for over-65s).

But Australia’s housing policies and tax settings are at odds with most of its global peers.

One exception is Germany, which also exempts owner-occupied housing from capital-gains taxes and has similar negative-gearing provisions. Yet, Germany’s house prices have remained relatively steady in recent years, while Australia’s have skyrocketed.

Much to do with the lending policies of our big banks, Dr Martin said.

“There’s a self-fulfilling prophecy aspect,” he said.

“People see house prices going up and if they’re existing owners then their equity in housing has gone up, and they can go to the bank and get a loan for another house. Then more people do that, and prices go up.”

In contrast, Germany has fewer owner-occupiers, more affordable housing, and a finance sector less focused on home lending. Dr Martin said German banks were “more interested in lending to businesses to do productive stuff, to support industries that export to the world”.

He said Labor’s proposed rollback of real estate investment benefits was a “good, if modest” start to reducing the “excess of demand” from those chasing speculative gains at the expense of would-be owner-occupiers.

“The key point is that, as things are now, we’re wasting our credit-worthiness. If we were using credit to invest in things other than existing houses, like more businesses or ideas, then that’s better for us,” he said.

“That’s where a real increase in wealth for the whole country comes from”.