Poor old negative gearing, carrying the can for perceived housing affordability problems, fitted out as a convenient scapegoat, so much easier to blame it than to deal with the myriad factors bearing on housing supply and demand.

The ability to offset losses on one investment against income made elsewhere has actually served the overall Australian economy well and done plenty of positive things for housing affordability as well. (That probably sounds like heresy, but I'll come  back to it.)

Anyway, there's no need to expend too much energy attacking negative gearing as the market is in the process of sorting out any excesses – a process that could see recent property investors retreat from buying in the same way that punters flee the stock market when it takes a turn.

Basically, there's a good chance negative gearing the average residential property won't make much sense for most investors over the next few years.

The tip is in the title: "negative gearing" – the investment loses money unless there's a fat capital gain above and beyond capital gains tax. And the tax benefits of the deduction for losing money on housing aren't really that flash on anything less than the top marginal tax rate, a privilege enjoyed by relatively few.

Given increasing supply and flat or falling rents in key investor markets and subdued capital gains forecasts for at least the next couple of years, negative gearing is looking negative indeed, especially when punters can positively gear into equities instead.

Some of the most investor-centric real estate markets are already showing strain. Reserve Bankers have fingered Melbourne CBD apartments as a potential worry, BIS Shrapnel has issued warnings about Sydney CBD units and Brisbane property analyst Michael Matusik has been ringing the alarm bell with increasing urgency over "investor specials" there.

With an echo of every investment scheme on the edge, Matusik recently wrote to clients that his firm had been approached with offers to become involved in several off-the-plan Brisbane developments.

"The conversation starts with how much commission is available, with the starting figure often 6%, sometimes more," said Matusik. "This, to me, is a bellwether. 
 
"New apartment sales across inner Brisbane are about to get harder.  And they should, as for mine, this market is already saturated.  And despite everybody and their dog trying to put a sunny face on things, it looks pretty grim – investment wise – for some time to come."

Australia doesn't have a housing market; it is has hundreds, perhaps thousands of them. Some of our housing markets get more carried away than most – witness the Gold Coast pre-GFC. For that matter, the Gold Coast every decade or so.

Investors who piled into mining towns have seen prices slashed. Negative gearing won't have done any favours for anyone who bought into a mining town over the past couple of years.

But it's Brisbane that is shaping up as the more general warning to investors just when the Reserve Bank is jawboning investor excess.

Resales of recently-purchased Brisbane CBD units have been at a loss. There has been a rush of apartment towers completed recently with more on the way.

Michael Matusik reports local real estate agents as saying it's taking longer to rent units and that rents are falling. Quality but older riverfront apartments are typically empty for four weeks between tenancies and then rent for 10 per cent or more below the previous lease.  Some owners are offering a month's free rent.

And he has an interesting twist to the foreign buyers scare campaign:

"When the foreign investors come to sell, they will not be able to sell to other foreigners.  This is currently not allowed under FIRB regulations.  So the pool of potential buyers will be much smaller.  This could cause significant price decreases for resales of apartments, particularly in larger projects."

Maybe Kelly O'Dwyer's parliamentary committee looking into foreign investors should consider freeing them up rather than further restricting their buying. 
 
There's nothing wrong with an individual losing money on an investment, unless, of course, you are the individual.

Or unless there are a large number of investors losing at the same time, causing a broader economic problem. The one thing worse than sharply rising housing prices is sharply falling housing prices.

Former economic adviser to the Gillard government, Stephen Koukoulas, has pointed to why the RBA and others should not get to excited about hosing down the housing market - or perhaps he has described why the RBA is doing more jawboning than acting on macro prudential means of reducing housing demand.

Roughly two-thirds of Australians own or are in the process of buying their homes and there's an overlapping 10 per cent who own at least one rental property. Rising housing prices have been and are vital for maintaining their consumption desires – the wealth effect – when real wages are falling.

With the economy expected to grow below trend this financial year, the RBA has no interest is further sabotaging consumer confidence.

And then there's the matter of negatively-geared property investors improving housing affordability for those who are most disadvantaged by the high cost of housing: renters.

There is a general media and political bias towards looking at the housing affordability problem from angle of one minority group: would-be first home buyers.

Of the roughly one third of Australians renting, many are not in the trying-to-buy-a-home class – they are on one form or another of social welfare or at a transient stage of their lives. Excess investor activity, allegedly fuelled by negative gearing, ends up providing excess rental properties that eventually make it cheaper to rent.

There is a rational economic decision for people to make here: if it is cheaper to rent than to buy, including expectations of capital gain and the cost of money, go ahead and rent.

And there is the matter of Harris' Law, as I've named it, after Tony Harris, the former NSW auditor general who coined it: Everything is capitalised.

All government policies end up being built into the price of the goods or services affected by those policies.

Fairfax colleague Gareth Hutchens nicely described examples of that in his article last week claiming that negative gearing should be abolished  – give first home buyers a special grant and it is very quickly built into the price of the properties they are seeking, so the FHBs are no better off. First home buyers' grants would be better titled "first home sellers' grants".

Hutchens attacked negative gearing, quoting the esteemed economist Saul Eslake, because it increased demand for housing, which in turn forced up prices.

But right now, we need increased demand for housing, both because of population growth and an otherwise below-trend economy.

More fundamentally, the article honed in on the negative gearing scapegoat because it only addressed the housing affordability question from one side of the equation – demand – and did not mention the other side – supply. Fixing the supply problem is a better way of solving the housing affordability problem than trying to arbitrarily restrict broad taxation principles for one particular sub-set of an asset class.

Negative gearing does increase demand, but in doing so, it also increases supply.  Increasing supply is a good thing, but there are many other factors affecting it, ranging from NYMBYs to merely incompetent and gutless state and local governments, plus the decline in government investment in social housing.

What concerns the RBA is the possibility that, maybe, perhaps, too many investors are becoming too exposed to a potential correction, but the Martin Place mandarins are not so concerned as to actually do anything much yet.

Last Tuesday RBA deputy governor Philip Lowe was sounding alert but  less than alarmed about housing investors' animal spirits in a speech that was swamped from a news point of view by Gough Whitlam's death.

Lowe said the increased demand for existing housing assets was translating nicely into increased demand for new housing construction, with residential construction up by 9 per cent over the past year with further increases expected. Monetary policy was working.

But the strong recent increases in prices "together with pockets of higher borrowing" posed questions posed about financial or macroeconomic risk.

Said Lowe, after a qualification or two: "The judgment we have reached over recent times is that at least some aspects of the housing market have become somewhat unbalanced and that this has generated some increase in overall risk.

"The area that has attracted most attention is the very strong demand by investors to buy housing for the purposes of renting. Currently, loan approvals to investors buying properties to rent out account for nearly 45 per cent of total loan approvals, with most of the investment properties being existing properties.

"Perhaps not surprisingly, the biggest increases in housing prices have occurred in the city where investor demand has been strongest – namely Sydney. Overall, investor credit outstanding is growing at an annual rate of close to 10 per cent, around twice the rate of increase in household income. A fairly high and increasing share of these investor loans do not require the repayment of any principal during the life of the loan. And this is all occurring in an environment in which growth in rents has slowed and the ratio of housing prices to income is at the top end of the range experienced over the past decade or so...

"It is important to make clear that I am not saying that this will end badly, or even that is likely to end badly – just that, on average, recent loans are probably a bit more risky than those made earlier…it is prudent for both borrowers and lenders to be careful."

Yes. And just abolishing negative gearing, if a government could in some future fairy land, would be a poor and inequitable stab at the bigger problem.

There are plenty of ways of reducing demand for property - scrap the capital gains tax concession, boost land tax, amputate the little fingers of every tenth buyer, and so forth. However, in the short-term, parts of the market will do it as a lesson in the cost of exuberance.

Increasingly supply, given our population growth, is a much better way of equitably dealing with housing affordability.

Michael Pascoe is a BusinessDay contributing editor