The prime minister and Treasurer Scott Morrison announced on the weekend that the government would not reform current negative gearing policy in the upcoming May budget.
Mr Turnbull said the Labor Party's proposal on negative gearing was “reckless” and a “big sledgehammer” to Australia’s property market.
“Mr Shorten and Labor argue that a shock of this size would have little or no adverse impact on confidence, investor willingness to pay, or the housing market more generally,” the PM said.
“In contrast, the Coalition is of the firm view that it would significantly reduce investor demand and house values and lead to a range of other undesirable impacts.”
To offset the removal of negative gearing, investors would seek to increase their pre-tax cash flows, placing upward pressure on rents, Mr Turnbull said.
“Negatively geared investors would also seek to cut back on maintenance and repairs, and would reduce other costs in an effort to reduce their net rental losses.
“Over the longer term, as the market adjusts to the fall in investor demand, there would be fewer rental properties, as existing dwellings fall into disrepair and are withdrawn from the market.
Mr Turnbull pointed to the UK and the US where the removal of negative gearing resulted in a crisis in rental markets, causing serious hardship and forced governments to spend billions of dollars in subsidies.
“Nobody wants to see that happen except apparently Mr Shorten and the Labor Party,” he said.
However, a new report by the Grattan Institute, Hot property: negative gearing and capital gains tax, said changes to negative gearing would save the government approximately $5.3 billion a year and improve housing affordability.
“The capital gains tax discount should be reduced from 50 to 25 per cent and negatively geared investors should no longer be allowed to deduct losses on their investments from labour income,” the report by John Daley and Danielle Wood said.
“A smaller discount would save about $3.7 billion a year, while the change to negative gearing would raise $2 billion a year in the short term, falling to $1.6 billion as losses start to be written off against positive investment income.
“The reforms would provide relief to the budget in tough times and slightly improve housing affordability with little impact on how much people save. Property prices would be up to 2 per cent lower under these reforms than they would be otherwise.”
In response, Mr Turnbull said he had a lot of respect for the Grattan Institute, but its depiction of the impact proposed negative gearing changes would have on the property market was incorrect.
“Unfortunately, the paper is littered with factually incorrect statements, claims that are unsupported by evidence and direct contradictions. And its economic analysis in many places leaves a lot to be desired,” the PM said.
“The paper ignores the fact that reducing the CGT discount to 25 per cent would give Australia the second highest CGT rate among comparable countries. While the paper claims this too would have no harmful impacts, that assertion is directly contrary to the evidence, which it systematically ignores.
“Daley estimates that his proposed negative gearing changes would raise an additional $2 billion in tax revenue each year from negatively geared investors – just think about that for a moment.
“Tax revenue always has to come from somewhere. In 2013-14, negatively geared investors earned gross rental income of $20.5 billion. So using Daley’s revenue estimate, we see that the effect of this proposed change would be similar in magnitude to a permanent 10 per cent fall in gross rental income for each and every one of Australia’s 1.26 million negatively geared property investors.”