Labor’s negative gearing plans will increase the government’s tax take from property investors. Picture: Supplied.

The popular tax break — a key election battleground amid Labor’s plans to limit it to new homes only — are being used by fewer people, and this month’s official rate cut will shunt more investors out.

The latest Australian Taxation Office data shows that the number of investors claiming rental losses dropped sharply in five years, from 1.69 million in 2009 to 1.25 million in 2014.

This is largely because investors’ monthly interest costs have dropped by one-third in just over five years. For a typical $400,000 interest-only investment loan, monthly repayments have fallen from $2450 to $1667 since late 2011 and many economists believe interest rates will fall further.

The number of investors claiming rental losses dropped sharply in five years, from 1.69 million in 2009 to 1.25 million in 2014. Picture: Supplied.Source:News Limited

Rick Nieuwenhoven, the CEO of property investment firm Nieuvision, said lower interest rates reduced the tax deduction for investors but helped their investments to become profitable faster.

Negative gearing is a tax deduction when an investment’s expenses are greater than its income. Despite its stigma in some circles as a plaything of the rich, the majority of claims are from people on taxable incomes between $40,000 and $70,000.

Labor wants to scrap it for people who buy established properties from July next year, prompting a new campaign from real estate industry giants and warnings that it could cause house prices to fall and rents to rise.

“Demand for older properties from an investor’s point of view could soften, meaning prices could potentially stagnate or drop,” Mr Nieuwenhoven said.

“The proposed changes will only capture new entrants to the market as the tax changes are not retrospective, and therefore the next generation of potential investors could be the ones disadvantaged the most.”

Century 21 Australasia’s owner and chairman, Charles Tarbey, said Labor’s plan would create more business for real estate agents but he still opposed it.

Century 21 Australasia’s owner and chairman, Charles Tarbey opposes Labor’s negative gearing plan. Picture: suppliedSource:Supplied

“More property will be coming onto the market … All of our surveys are indicating that landlords will get out of property,” he said. This would put pressure on home prices and public housing, he said.

“My biggest concern is that property has proven to be the most stable investment. It’s the one that creates the most jobs and they want to tamper with it, and that scares the hell out of me.”

Mr Tarbey said the current system worked fine. “To investors, negative gearing is a business. All other businesses can claim their interest costs. Is negative gearing not the same?”

AMP Capital chief economist Shane Oliver said the benefits of negative gearing had reduced because of falling interest rates, and he believed Labor’s plan would distort the market.

“It will force investors to allocate their money to new property,” he said. Currently investor financing for established properties is at least five times larger than for new properties.

“It’s an issue where people on either side of the fence swear black and blue that there will be a large distortion or no distortion at all,” Dr Oliver said.

The Property Council of Australia wants Labor to release its modelling of the proposed negative gearing changes effect on rents and the property market. “Australia has a shortage of housing and negative gearing encourages investment in supply,” CEO Ken Morrison said.