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Increasing divide between home owners and ren -

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TONY EASTLEY: Government policies and tax arrangements which favour homeowners and property investors are increasing the divide between renters and people who own their own homes.

A report by the Grattan Institute has found that homeowners and investors are receiving $36 billion worth of subsidies through exemptions from land and capital-gains tax, as well as negative gearing rules.

A report, 'Renovating Housing Policy' was written by the Grattan Institute's Cities program director, Jane-Frances Kelly.

She's been speaking to AM's Katie Hamann.

JANE-FRANCES KELLY: The Government is paying benefits in the form of tax breaks and subsidies to homeowners, the equivalent of around $36 billion a year, and a further $7 billion a year or so to property investors, to landlords. (Inaudible) about 25 per cent of renters receive Commonwealth rent assistance. That's worth much, much less.

KATIE HAMANN: What shape do these subsidies take? What are the largest exemptions or benefits that homeowners are receiving?

JANE-FRANCES KELLY: So for a start there's about $14 billion a year's worth of capital gains tax exemptions for the family home. And the pension assets test exemption of course is worth another $7 billion or so. And the land tax exemption is another $5 billion.

Property investors benefit from around $7 billion worth of annual expenditure, and that's in the form of negative gearing and the capital gains tax discount.

KATIE HAMANN: And you believe that these policies have played a role in pushing up the price of housing in Australia in recent decades?

JANE-FRANCES KELLY: Well a lot of the structural increases in prices over the last couple of decades have not been to do with government, they've been to do with lower interest rates making it cheaper to borrow money, and increased demand due to smaller households, higher incomes, population growth, all against a context of very constrained supply.

So that's what has been responsible for most of the increases in prices.

But now, government policies are inflating demand for housing and therefore putting up prices. And that's through things like negative gearing and capital gains discounts for property investors, and first homeowner grants, which just end up pushing up prices and ironically making it harder for first time buyers to get into the market.

KATIE HAMANN: How can we address this inequality? Is it a case of giving more to renters or taking it away from homeowners?

JANE-FRANCES KELLY: We're not suggesting that because government needlessly subsidises homeowners to the extent that they do, that they should also start subsidising renters.

What renters really need is more stability, more of an ability to make a home out of the rental property. What we suggest is that we take a look at tenancy law and to try and encourage longer lease terms.

Australia has some of the shortest lease terms and the shortest notice periods in comparable countries. Overseas experience shows that's quite easy to change without unduly disadvantaging landlords or affecting the returns that landlords get.

And then on the other hand, we suggested reforming negative gearing and capital gains tax discounts to stop the inflated demand for current supply by property investors.

TONY EASTLEY: The Grattan Institute's Jane-Frances Kelly speaking to Katie Hamann.