With house prices surging, a new RBA submission identifies negative gearing as one feature of the tax system - alongside concessions on capital gains tax - that pushes people to borrow and invest in bricks and mortar. The process of looking for a house will be exciting (but also, equal parts annoying). "The Bank believes that there is a case for reviewing negative gearing, but not in isolation. Its interaction with other aspects of the tax system should be taken in to account," the RBA told a parliamentary inquiry on home ownership. The RBA has previously branded the current investor-led surge in house prices "unbalanced" and governor Glenn Stevens has described Sydney's market as "crazy". The RBA said that being able to deduct legitimate expenses incurred while earning an income was an "important principle in Australia's taxation system, and interest payments are no exception to this."

If being able to negatively gear meant that landlords accepted lower rental returns, the policy may be helpful for housing affordability for renters, it said. However, it also said that when combined with the 50 per cent discount investors receive on capital gains, negative gearing "may have the effect of encouraging leveraged investment in property." The combination of negative gearing and concessionally-taxed capital gains helped to make capital gain-producing assets more attractive than income-producing assets. These effects were amplified when assets were purchased with leverage - some proportion of debt - as is generally the case with property. The comments come amid a debate about the tax breaks that housing investors receive, and the role this plays in the housing market. Treasurer Joe Hockey on Wednesday again ruled out action on negative gearing.

The Bank believes that there is a case for reviewing negative gearing. Reserve Bank submission "Individuals should be able to deduct the expenses of a business or an investment against their primary income. That's a principle," he said. "By removing negative gearing on real estate as some are suggesting.. they are creating an exception to a standing rule in taxation law, and that is that you can deduct the losses against another form of income. That (abolishing negative gearing) would be creating another exception." The RBA's submission notes Australia's tax perks for housing investors are "at the more generous end of the range of practice in other industrialised economies, but not overwhelmingly so." Labor has put its policy under review, and Opposition finance spokesman Tony Burke on Wednesday said a new property tax proposal from the Grattan Institute could be an efficient way for state governments to raise more revenue.

Negative gearing allows investors to deduct interest payments against other forms of income. It has been put in the spotlight amid a surge in house prices in Sydney and Melbourne, which has been underpinned by a boom in lending to property investors. The RBA also noted a long-term increase in the share of people owning investment properties between the early 1990s and mid 2000s. The share of these landlord investors who had claimed a rental loss had increased to just under two thirds in 2012, up from about half in the late 1990s. The RBA's submission said the rate of home ownership in Australia had been "broadly steady" since the 1960s at about 70 per cent.

"Australia's home ownership rate appears neither unusually high nor unusually low compared with other countries," it said. Identifying "opportunities for reform," the RBA said that increasing the supply of housing may help make housing more affordable, but said there was no precedent for this leading to significant house price falls. It also said that policy "should not unduly advantage property investors at the expense of prospect owner-occupier home buyers." "Financial stability considerations would suggest that tax and regulatory frameworks should avoid encouraging over-leveraging into property, whether by owner-occupiers or investors," the paper said. Another issue highlighted by the RBA was a change in 2003 that allowed superannuation funds to borrow and invest in property.

It said this had increased the "potential pool" of investors at the margin. The financial system inquiry - to which the government is expected to respond soon - last year recommended this practice be scrapped.