Former banker and chair of the Financial Systems Inquiry David Murray says Labor's plan to restrict negative gearing to new housing investment will "distort" the market and possibly lead to a fall in prices for established property.

"Any change to taxation arrangements will have price effects in markets," David Murray told RN Breakfast.

However, he also said that outcome could be good for the economy if it improves housing affordability.

"A strictly personal view is that [housing] affordability and people being able to learn, live and work and be with their family in their home is an important contributor to the economy," Mr Murray said.

"So to me personally affordability is very important."

Mr Murray's comments come as the Turnbull Government appears to be walking away from negative gearing reform after a backbench revolt against any change.

That revolt was joined by ousted prime minister Tony Abbott in the party room on Tuesday who urged current Prime Minister Malcolm Turnbull to fund personal and company tax cuts by slashing spending rather than through tax increases.

Prime Minister Turnbull and his Treasurer Scott Morrison had reportedly been looking at a plan that would impose a $20,000 cap on annual negative gearing deductions to take the "excesses" out of the system.

According to the Australian tax Office, 1.3 million taxpayers used negative gearing in 2013, with most landlords falling in the $80,000 a year or less taxable income bracket.

However, the biggest deductions were claimed by those on much higher incomes.

Labor said, if it wins the next election, it will restrict negative gearing to new housing only - although its changes would not be retrospective, meaning current investors in established homes will still get the tax deduction.

It will also cut in half the current 50 per cent discount on capital gains tax if the property is held more than a year.

Labor has estimated that its plan will save the budget $32 billion over a decade and create 25,000 construction jobs a year.

However, Mr Turnbull has attacked Labor's plan, arguing it would "smash" house prices and raise rents.

Sorry, this audio has expired Turnbull unlikely to scale back negative gearing

That is despite former treasurer Joe Hockey telling Parliament last year that skewing negative gearing towards new housing would give "an incentive to add to the housing stock, rather than an incentive to speculate on existing property".

The Henry Tax Review, the Reserve Bank and the Financial Systems Inquiry have all called for the negative gearing of property to be reviewed.

David Murray said his inquiry's concern was the risk of negative gearing causing instability in the financial system - because it encouraged investors to borrow more money and gear up into property, which in turn could cause a speculative bubble in house prices that was then vulnerable to a crash.

However, he said it was difficult for politicians to mount a case for change when the public believes there is no urgency in doing it.

"The more distortions and inequities that build up in a system, the harder it is to change absent a consensus about the serious need to change," Mr Murray lamented.

"We've all got to wait for the economy to get worse before we can agree that something needs to be done."