Negative gearing - turning off the third rail?

An eyebrow-raising report in the Herald today:

THE Gillard government has sounded out unions over steps to cool Australia's housing market, with measures that range from a new sales tax for investors sitting on large property portfolios, to curbing the popular strategy of using negative gearing for multiple properties.

The proposals to do something about negative gearing, in particular, catch the eye. Is the Labor Government finally daring to touch what has long been regarded as the third rail of Australian politics, in order to slow the debt-laden housing loco as it barrels down the line?

(Labor ministers and union representatives gingerly prod the third rail.)

The report is short on details, but gives an outline of the strategy:

[T]o reduce political risk, the changes have been designed to target only the wealthiest property owners, leaving those with one investment property untouched.
...
[The negative gearing] proposal is to scale back the negative gearing tax benefit from its 100 per cent benefit as the number of investment properties rise.
...
About 1.7 million property owners used negative gearing in the 2009 financial year, claiming rental losses as a tax offset. This generated a net rental loss of $6.5 billion for the financial year, Tax Office figures show.
They show about 1.19 million Australians own one investment property. About 294,000 have two investment properties, while those with three number 88,300.
Meanwhile, about 14,100 Australians have six or more investment properties, the figures show.

Our housing system sorely needs negative gearing to be reformed, but does it need this sort of reform?

Do we need further preference given to small-holding amateur landlords, who all-too-often get into the market without a second thought to tenancy, instead of multiple-property holders who might take a more professional approach to their business?

Do we need to further encourage the dedicated negative-gearists out there to borrow up big and spend up big on a single property ('aw yeah, it's a premium property!'), instead of building a portfolio of lower price - and hence lower rent - properties, which is what we really need?

There's other ways of reforming negative gearing. There's the short-lived 1985 reforms – recently reprised by Saul Eslake – which allowed landlords to set their losses (ie the amount their rental income fell short of their interest payments) only against future rental income or capital gains, rather than against all their income from work and other sources.

Or there's restricting negative gearing to newly constructed properties only, and for a certain number of years post construction.

Or there's the Henry Review's proposal to reduce the tax preferencing of capital gains by discounting tax on rental income... more on that as our review of the Henry Review continues.