Tax breaks for property investors must be tackled if the nation is to safely navigate the still-burgeoning property boom says the head of the government's financial system inquiry.
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David Murray, who is a former Commonwealth Bank of Australia chief executive, told Fairfax Media that tax breaks for property investors such as negative gearing needed to be addressed to complement the efforts of regulators to cool down the housing market.
The call came as another business lobby group, the Australian Institute of Company Directors, said negative gearing had led to "distortions in the housing market".
New data on Monday from CoreLogic showed house values surged another 1.4 per cent across Australia in March, pushing annual price growth to 19 per cent in Sydney and 16 per cent in Melbourne.
House values in Sydney are now growing at their fastest yearly rate since November 2002, while growth across all capital cities is at a seven-year high (12.9 per cent).
The strong market prompted the Australian Prudential Regulation Authority on Friday to tighten rules around interest-only lending while the Australian Securities and Investments Commission moved on Monday to raise scrutiny of the same category. The Reserve Bank of Australia will meet on Tuesday to consider interest rates.
Mr Murray said he supported action taken by the banking regulator to tighten lending.
"From a stability perspective I think [house prices in Melbourne and Sydney] are potentially unhealthy and so I support the further action that APRA has taken," he told Fairfax Media.
But he said tax breaks for investors - negative gearing and capital gains tax concessions - also needed to be addressed.
"There has to be a look across the system at what fuels demand to see whether it's sensible to change [tax settings] remembering many of these things have unintended consequences in other parts of the economy," he said.
"As our report made clear, the tax regime in Australia is very beneficial to house ownership, versus investment in other assets.
"Once momentum in these asset markets build, and investors start to believe there's no possibility of a loss, it's this spiralling of prices that needs to be addressed."
The AICD has called on the Turnbull government to "examine the unfortunate nexus" between the treatment of negative gearing and the current discounted capital gains tax arrangements.
It says all they do is boost after-tax returns from investment in existing residential property and make housing less affordable.
It recommends the CGT discount be pared back from 50 per cent to 40 per cent, as was recommended in the former Labor government's Henry Tax Review back in 2010. Such a move would boost the budget by $6.4 billion over four years.
The government should also have the political will to review negative gearing so that it only applies to "productive assets".
"Negative gearing is a part of many Australians' investment plans," the AICD 2017 blueprint for reform released on Tuesday noted. "However, it has led to ineffective tax outcomes and, in part, distortions in the housing market."
A Treasurer spokesperson said the government supported the "sensible and careful" measures taken by APRA and would not comment on tax breaks for investors.
"We'll keep a close watch on these issues in terms of any additional action that is needed."
The Australian Prudential Regulation Authority wrote to banks on Friday, saying it expected them to tighten their lending practices particularly on interest-only and investor loans.
The new rules will require banks to limit the flow of new interest-only lending to 30 per cent of total new residential mortgage lending. Currently the major banks are sitting around 40 per cent.
They do not reduce the existing 10 per cent limit on growth on investor lending, as many in the market were expecting.
The corporate watchdog announced on Monday it would also conduct surveillance of lenders and brokers spruiking interest-only loans.
It also revealed eight lenders, including Commonwealth Bank, National Australia Bank and ANZ, were on the hook for possible refunds for interest-only customers after finding shortcomings in their lending standards.
The RBA is due to meet on Tuesday for its cash rate decision.
Brokers on Monday played down the impact of the new APRA rules.
"The reality is, from an investor point of view, the reason they go for interest-only loans is to maximise tax deductibility. It means they can claim a 100 per cent deduction," Peter White, executive director of the Finance Brokers Association of Australia, said.
"Now they're not going to get quite the same benefit, but it's still going to be around 80-90 per cent."
Mr White said most loans were interest-only anyway for the first few years, which was often how long an investor held onto a property.
"Investors may not get as big a leverage, but they're still going to get something," he said.
Shadow Treasurer Chris Bowen called on the government to abolish tax breaks for property investors following the APRA announcement.
"Policies such as negative gearing and capital gains concessions encourage leverage and excessive debt and they should be curtailed," he said on Friday.
