Limiting tax breaks for property investors to new buildings will have many unintended consequences that go well beyond any tax saving to the federal budget.

They include increased rents – possibly by as much as 10 per cent – and fewer properties being built that would result in less employment.

That’s the view of forecaster BIS Shrapnel in an analysis of Labor’s proposal to end negative gearing on established properties from mid-2017 should it win this year’s election, but allows existing investments to continue beyond that date.

“The policy change will create a `discouraged investor effect’ that will dampen investor demand for housing,” BIS Shrapnel says in the report released.

Investors under present rules would have a strong incentive to hang on to their properties in order to prolong the old regime.

While negative gearing would still apply to new dwellings, BIS Shrapnel believes it is doubtful that this would attract significant investment funds into new dwellings.

“When you later came to sell a property … the next owner won’t qualify for negative gearing and therefore you would not be able to sell it without taking a price fall,” it says.

Developers would find lower returns from developing new dwellings, relative to cost, diminishing their ability to build new homes.

It could see new building shrink by around four per cent annually and result in 175,000 fewer jobs being created over the next 10 years.

“Lower rental stock means higher rents,” it says.

It estimates the policy would push 70,000 extra households into housing rental stress, and should the government decide to compensate these people, it could cost $650 million.

While the government will save $2.1 billon a year as fewer individuals deduct losses from property, it will incur an income tax loss of $1.8 billion from lower home building.

State governments would see a fall of around $1.1 billion from a drop in stamp duty revenue and a $200 million decline in GST collections.