Federal inquiry attacks negative gearing

"The tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment," the report said.

"Since the Wallis Inquiry [in 1997], higher housing debt has been accompanied by lenders having a greater exposure to mortgages. Housing is a potential source of systemic risk for the financial system and the economy."

The report said capital gains tax concessions for assets held longer than a year provide incentives to invest in assets for which anticipated capital gains are a larger component of returns.

Reducing those concessions would produce a "more efficient allocation of funding in the economy", according to the report.

Ray Hair, general manager of national sales at Homeloans, agreed that negative gearing does distort the market because it makes an investment property more attractive than it would otherwise be.

However, Mr Hair told The Adviser that negative gearing had done more good than harm for the property market and had helped boost the supply of rental properties.

"While there is clearly a tax advantage, it's one that has been around for a long time and a lot of investment decisions have been made on the basis of it," he said.

Mr Hair said scrapping negative gearing would reduce investor demand, although the precise consequences would depend on the context in which it was removed.

"If other tax incentives were also removed so that it was a level playing field from an investment point of view, then the impact may not be as adverse," Mr Hair said.

"However, if negative gearing in isolation was removed then you could potentially get a [sharp] reaction until there was a new equilibrium in the market."

Prominent economist Shane Oliver recently said that negative gearing is one of three "scapegoats" being used to explain rising house prices, the other two being foreign investment and SMSF buying.

"Negative gearing is more contentious, but it's likely that curtailing access to it when stamp duty remains very high will have a negative impact on the supply of property to the extent that it will have the effect of reducing the after-tax return to property investment," he said.

"Restricting negative gearing for property would also distort the investment market as it would still be available for other investments."

[Related: Ending negative gearing would be 'catastrophic', say brokers]