There are two types of property market pundits – those who favour negative gearing and those who want it abolished or stripped back.

In a new report, the peak body for the housing construction industry has come out firmly in the former camp, saying that diluting negative gearing would reduce the appeal of investing in housing, worsen the current undersupply, and drive up rents.

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Negative gearing allows investors to fully deduct losses associated with a rental property against their income, reducing their tax bill.

Latest statistics from the Australian Tax Office show 1.27 million people exercised negative gearing in 2011-12, with negatively geared property investors claiming $13.8 billion in losses. The average loss for each investor was $10,900 and double for those earning more than $180,000 at $22,750.

Stopping investors from negatively gearing property is likely to free up about $4 billion a year to the budget.

The new report by the Housing Industry Association (HIA) has challenged the 2010 Henry Tax Review, which recommended reducing the level of tax deductions available from negative gearing by 40 per cent.

The HIA report says removing negative gearing would exacerbate housing supply issues. But the HIA has another solution. It says getting rid of stamp duty is a better means of improving housing affordability and removing barriers to investing. Stamp duty is the often very high fee paid to a state government for buying a property.

But Dr Helen Hodgson, Associate Professor in the Department of Taxation at Curtin Law School, isn’t convinced.

Dr Hodgson believes removing stamp duty would likely create an effect similar to the first-home-buyer discount, which she says actually drove house prices up. That is, more people will jump into the market, pushing up demand and therefore prices.

Many investors are enticed by negative gearing. Photo: Getty

“Stamp duty removal I would expect to have a similar impact,” said Dr Hodgson.

Dr Hodgson says calls to abolish stamp duty and maintain negative gearing are simplistic.

“The problem is when you have negative gearing combined with a discount capital gains tax,” Dr Hodgson says.

“What happens is people get tax deductions along the way. They’re prepared to make a loss at the end of the day when they get a capital gain they don’t pay full tax on. It’s the combination of the two that creates this environment that causes a tax policy problem.”

Dr Hodgson is in favour of reducing negative gearing but stresses it would also have to fall in line with supplying more homes.

“If you’re talking about purchasing housing, then removing negative gearing should help keep prices from going higher,” Dr Hodgson says.

“That’s not the same issue when you’re talking about rental accommodation. If you remove negative gearing you have to find some way of making sure there is still enough property around for the renters.”

The HIA report said that discounting negative gearing would create problems.

“Adding to the tax burden on rental properties reduces the incentive to invest in housing, and therefore reduces housing supply,” the report said.

“This lower supply raises the cost of housing for both renters and owner occupiers.”

It suggested abolishing stamp duty on property transfers would improve housing affordability and living standards.

The report said an estimated $7 billion was paid in stamp duty on residential property conveyances in 2011/12, with $1.3 billion offset by negative gearing.

Adrian Raftery, senior lecturer in financial planning and superannuation at Deakin University, believes any losses should be quarantined and only offset by future gains made by rental properties.

“It’s too attractive, especially for people on higher incomes, to increase their wealth by getting the tax favour to help fund it,” Mr Raftery said.

“I think some people go into these investments for the wrong purpose and purely for the tax purposes rather than going in for the good investment.”

—with AAP