Some claim that negative gearing encourages more homes to be built. If so, it is a very inefficient way to do it. Only 5 per cent of negatively geared properties are new homes; the rest are existing properties. Because negative gearing increases the price of homes it may encourage a little more building. But the big restraint on new building is not a lack of profitability in housing, but the availability of land and the vagaries of our planning systems.

Like most tax concessions on investment, negative gearing is biased to the wealthy. Most people with negatively geared residential property are in the top 40 per cent of income earners. The top 2 per cent of income earners claim half of all capital gains.

The most important argument against negative gearing is that it drives up house prices because it increases the after-tax returns to housing investors, and so prices are higher than they would be otherwise. This helps existing home-owners but accelerates falling rates of home ownership among younger age groups.

The belief that negative gearing keeps rents low seems to be a folk memory from when the Hawke Government temporarily abolished negative gearing in the 1980s. Rents rose rapidly in Sydney and Perth. But rents were stable in Melbourne and Brisbane and the rate of growth fell in Adelaide. In Sydney and Perth population growth and insufficient new housing, not tax policy, were pushing up rents. Economic theory predicts that abolishing negative gearing shouldn't change rents. Every time an investor sells a property to a renter, there is one less rental property, and one less renter – in other words, no change to the balance between supply and demand of rental properties.

The best way to both reduce housing market distortions and lower the budgetary costs of negative gearing would be to remove the capital gains tax discount. This could net the Commonwealth up to $5 billion a year in extra revenue, while removing an incentive for house price speculation.