This is an excellent analysis of the problem. Negative gearing means people expect to get their profits from inflation in house values not from income from renting.

If it costs more to service the loan than is collected in rent then the property should be sold.

The fault also lies with banks who give what are clearly uneconomic loans to so called investors. Banks could take more responsibility for such loans. Perhaps they could be encouraged to do so by invoking the National Responsible Lending Laws and refusing what are clearly uneconomic loans for investment housing.

Maybe this is a way to reduce the housing price bubble that exists in Australia. The banks could agree that they will stop funding such loans because it is irresponsible of them to do so. It would be hard for any political party to oppose this and it would get the politicians "off the hook".

I am one of those who benefit from the existing idiotic taxation system but have often pointed out the problems. This article matches my sentiment precisely.

I am an older self funded retired widower who earned around $2000 per week through leveraged investments over the last several years but I received average refunds of franking credits of $23,000 over the last two. That allows me to spend about $15,000 on charitable activities per year but that does not make the present system reasonable or fair.

Up until the early eighties my wife and I raised five children on a single salary on a marginal tax rate of 66 cents (the then maximum). The marginal tax rate for such a position, now with a much inflated income, is now about two thirds of what I paid then.

Competition from the wealthy, overpaid professionals and executives seeking bricks and mortar securities for their excess income forces up house prices , increases the number of renters, and consequentually force up rents. Our politicians are either deluded, easily deceived, or duplicitous.

<Here were hundreds of students who actually understand that government creates many of the problems, and freedom—personal and economic liberty—makes things better.>
http://reason.com/archives/2011/03/31/students-who-get-it

<Put the smartest people in a room, give them enough taxpayer money, and they will fix most everything.>

Yeah right.

If negative gearing goes,houses won't be built unless Govt gets its greedy hands out of the house market.38% of house/land is Govt taxes and charges

What we need is a new Govt Bank that can create new money that equals growth debt free.Old money will still have a price.Banks should not be allowed to counterfeit our currency.They should only loan out the money they have.

Severe austerity will not improve our economy Saul.It just puts the wealth into the hands of even fewer,with a shrinking economy.

Great article, Saul Eslake. When our property bubble bursts shortly, storys will abound in the media as to why it happened. Your true life story - that our tax regime says "Stop working!" to employment and industry and "Go for your life!" to real estate speculators - is likely to go missing, however. There's a whole lot of inertia out there on this revenue system which is sending all the wrong signals.

ficklepicle - if people can pay back loans, with rent AND some of their own money - then why is lending irresponsible?

The bank gets their loan repaid. That;s what they care about.

Does anyone suggest the investment property market is tanking?

no of course not, people who own investment properties usually work pretty hard to buy them and keep them.

There is a point where the rent is greater than the repayment, and if you've bought sensibly, then that time is somewhere within 10 years of the purchase of the investment property, depending on where you buy and its attractiveness.

You can either then bank the difference between rent and repayment, or keep the property until you wish to sell it and cash in, then you pay capitol gains tax.

People do the sums and get involved or not, you can go spend the money on new TVs and overseas trips, whatever you like and some people wish to invest for their future.

Why is investment property seen as such an evil?

I don't think you understand what goes on in the property investment market at all.

Most people try to get their investment property positive as fast as they can, all the doom merchants work on the theory you buy a property for as little as possible then maximise your negative gearing for a loss you can offset against other gains. That's the corporate, not private investment model.

That's not the way everyone does it, so it's horses for courses.

I know lot's of property investors who either have paid off their investments or have them neutral.

How is a "bubble" applicable to them?