Tax breaks and grants to investors are distorting the property market.

Reader feedback has revealed just how much unco-ordinated federal and state housing policies have increased the problems facing potential owner-occupiers in achieving home ownership.

Widely offered first home owner grants, more recently limited to newly constructed or off-the-plan purchases, add to the distortions created by the negative gearing tax deductions.

With the current grants in place, many first home buyers with no or little experience are being encouraged to purchase in fringe locations and accept greater construction and market risks. If anything, it should be investors who are forced to focus on these types of dwelling, with their generous tax deductions helping to compensate for the higher risks of new property construction.

The restricted access to first home owner grants also encourages potential owner-occupiers to the alternative option of buying an investment property because of the tax deductibility of all expenses and the opportunity to focus on established properties in central locations. By doing this they avoid the risks of newly constructed or off-the-plan purchases.

Incredibly, both levels of government allow access to first home buyer grants even to existing property investors if they have never bought a property to live in. This allows potential home buyers to benefit from both the negative gearing tax arrangements and first home owner grants if they choose to do so.

Restricting access to negative gearing for purchases of newly constructed or off the plan properties would help first home owners in two ways.

It would reduce demand for properties in central locations and not force new owner-occupiers into higher risk options or out to fringe locations to achieve home ownership.

Changes to negative gearing arrangements are thus an essential part of policy changes to assist more Australians to achieve home ownership. Without such action, any new assistance will add to the upward pressure on existing property prices.

The most common defence of the $4 billion annual taxation subsidy to negative gearing is that it increases the supply of rental properties and reduces rents. If that is the real objective, confining the subsidy to purchases of newly constructed properties would be a more cost-effective policy.

As it now operates, negative gearing purchases are pushing up existing property prices, encouraging even further levels of geared property investment. At a personal level, current arrangements provide limited options for achieving home ownership unless there is family assistance to reduce ongoing debt commitment.

Family assistance mainly comes in two forms. It may be received as a gift or interest-free loan for a deposit. Alternatively it may be a joint property purchase, usually of an investment property, which can then be converted to a personal residence. Either option allows any capital gains tax liability to be deferred indefinitely.

Posted by Daryl Dixon – The Age on 27th March, 2015