Australia could be forced to rethink its stance on negative gearing and capital gains tax, as experts warn the Albanese government risks sleepwalking into a New Zealand-style housing disaster. 

Across the Tasman, a radical tax experiment sparked chaos in 2021. 

Then Labour Prime Minister Jacinda Ardern stripped property investors of their ability to deduct mortgage interest in a move designed to cool the housing market and stop investors snapping up existing homes.

Instead, critics say it triggered a brutal chain reaction.

Veteran property commentator Michael Yardney warned the policy, hailed at the time as a victory for renters, backfired spectacularly when landlords simply passed the higher costs straight onto tenants.

Rents surged, hitting record highs as investors either jacked up prices or fled the market altogether.

Yardney says Australia risks repeating the same costly mistake.

'The parallels for Australia are too important to ignore,' he said.

'The New Zealand experiment ran for roughly three years, and the results were unambiguous. 

'Removing interest deductibility didn't make housing more affordable. It didn't deliver a wave of first-home buyers into the market.

'What it did was make renting more expensive, push some investors out of the market, reduce the supply of long-term rental housing, and ultimately get reversed by the next government that had to deal with the consequences.'

Mr Yardney said the reality in New Zealand, as in Australia, is that the vast majority of property investors are ordinary working people - teachers, nurses and tradespeople who bought one or two properties as a long-term retirement strategy.

He said many had found themselves in a situation where they were being taxed on money they had 'never actually made'.  

'Many found themselves in a situation where their property was generating just enough rental income to cover interest costs, but they were still receiving tax bills based on the full gross rent, with no ability to deduct the mortgage,' he explained.  

As a result, landlords began converting properties to short-term accommodation on platforms like Airbnb, removing them entirely from the long-term rental pool.

Mr Yardney said when New Zealand went to a general election in late 2023, the issue became a clear battleground. He said Australia is on the same path. 

Treasurer Jim Chalmers has been accused by the Opposition of breaking a string of election promises after unveiling sweeping tax changes in his fifth Budget. 

Negative gearing will be wound back to apply only to new builds, while the  capital gains tax discount has also been axed. 

Under the rules that applied until Tuesday night's Budget, investors paid tax on just half their profits when they sold an asset. Now, that concession will be scrapped and replaced with a system indexed to inflation that hits everything from property to shares.

The overhaul has drawn a blistering rebuke from leading economists.

UNSW finance professor Peter Swan labelled the Budget 'by far the worst' he has ever seen, warning Labor was repeating a failed experiment that had backfired spectacularly in the past.

He pointed to Paul Keating's controversial 1985 decision to abolish negative gearing, a move that sparked a sharp drop in rental supply and was dumped within two years. 

'Within 18 months the collapse in rental housing was so bad that Keating had to reverse it,' he said. 

'I predict that Labor or a future government will also be forced to reverse the changes.'

AMP economist Shane Oliver said it was doubtful the tax changes would improve housing affordability in the long term, given the core driver of the crisis is a shortage of housing relative to population-driven demand. 

'While negative gearing is to remain for new homes, it's likely to result in unintended consequences by making it harder for first-home buyers to get into new housing,' he said.

'And policies that reduce investor interest in property overall will likely lead to less housing supply not more - with even the Budget papers estimating that the tax changes will reduce supply by 35,000 homes over a decade.'

Mr Oliver added the Budget is now projecting slightly higher immigration, lifting demand. 

He said it was unclear whether supply will improve despite the $2billion for new housing infrastructure, particularly given the hit from the tax changes. 

'The Government was right in its first term to focus on boosting supply. Two years into the Housing Accord goal to produce 240,000 homes a year we have been running around 60,000 below target and making no inroads into the undersupply of housing which we estimate to be between 200,000 to 300,000 dwellings,' he said. 

Mr Yardney agreed, saying Australia's housing crisis, like New Zealand's, was fundamentally a supply problem.

'There are not enough properties being built fast enough to meet the demand created by strong population growth,' he said.