Conversely, a very foolish policy in Australia is negative gearing, which IMO is one of the major reasons behind the property bubble. See http://en.wikipedia.org/wiki/Negative_gearing_%28Australia%2... for details.
The fact is in the USA most people can claim their mortgage payments interest as a tax deduction - which is more bizarre.
I agree it's a stupid strategy, but it's plain foolish to think that negative underpins property investment. If you removed it, in the short term there would be a dip in property investment, but this would only work towards creating a further supply shortage.
Negative gearing isn't a tax ruling - it's an investment strategy. Businesses use the tax deductibility of interest payments as a legitimate expense, so it's difficult to argue why this should be different for individuals.
The problem with negative gearing in the context of a tax deduction on housing investments is that it encourages speculation by reducing the losses on bad investments. This is why we have such a disconnect between housing prices and rental prices.