Treasurer Joe Hockey cannot bring himself to question the value of negative gearing.

The Reserve Bank of Australia has urged the Government to consider the future of negative gearing, especially on housing investments, as part of a submission for a home ownership inquiry.

With Sydney and Melbourne house prices continuing to soar, the RBA has pointed to negative gearing and concessions on capital gains tax as features of the tax system that push people to borrow for investment in bricks and mortar.

“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 the home ownership parliamentary inquiry.

It said the ability 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”.

The RBA believes that if being able to negatively gear makes landlords accept lower rental returns, the policy would help housing affordability for renters.

However, it found that if these measures are combined with the 50 per cent discount investors receive on capital gains, then negative gearing “may have the effect of encouraging leveraged investment in property”.

Negative gearing combined with concessionally-taxed capital gains makes capital gain-producing assets more attractive than income-producing assets, and the effects are amplified when assets were purchased with a proportion of debt, as is typically the case with property.

The RBA's submission noted that Australia's housing investment tax perks are “at the more generous end of the range of practice in other industrialised economies, but not overwhelmingly so”.

But none of this is washing with Treasurer Joe Hockey, who has again ruled out action on negative gearing.

“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.”

Hockey’s reticence to do anything is understandable in light of an Australia Institute report which found that not only do 67 per cent of the benefits of negative gearing go to the wealthiest 20 per cent of Australians, a large proportion of them live in Liberal frontbenchers’’ electorates too.

The report found that electorates of Tony Abbott, Malcolm Turnbull, Julie Bishop, Joe Hockey and Josh Frydenberg all featured in the top 10 electorates to benefit from negative gearing.

The report is accessible here.