Why negative gearing?

Well, it depends on how much money you have to put into a loan. For instance, historically houses close to the CBDs of the capital cities have had the highest capital growth, so it makes sense to buy an investment property in a suburb fairly close to the CBD if you want to maximise capital growth over the long term. However, most people would struggle to put together even a 10% cash deposit for the prices you need to pay in those areas now. Bare in mind, you won't even get a 4% yeild in Melbourne inner suburbs now, so to be cashflow positive you'd need a significant deposit, at least 50% maybe more (assuming a basic buy and rent strategy).

On the other hand, you might buy a house in a regional town with a 9-10% yeild and have postive cashflow even with a small deposit, but you're much less likely to get similar capital growth over the long term.

So, it might be possible to settle onto something in between. Say a well located home in a thriving regional centre, or further out from the CBD in a capital city. Hopefully have decent growth potential, and get around 5-7% yeild. Then its just a matter of how much deposit you need to turn it into a positively geared property.

So, some reasons why:

If people want to use the equity in their PPOR, then its essentially a 100% (or higher) loan, so its not a simple matter of paying a bigger deposit to bring costs down.

If people think the market is growing quickly, it may pay to buy the place now even if its negatively geared and lock in the price, rather than risk the market growing faster than they can save a big enough deposit to make it positive, then they pay it down quickly to turn it into positive sooner rather than later.

If people think that while the property is negatively geared at purchase date, they expect rents to rise quickly and for it to soon become positive just through rents alone and they want to lock in the price.

And of course, the main reason the masses do it:

If people believe that the capital growth of the property will outweigh the negative cashflow, and in the meantime some of that negative cashflow comes back via tax return.

I can't remember where I read it (probably API magazine but maybe not) where the person being interviewed owned a lot of property, and the numbers were something like $350k rental income per year, net loss of $70k per year, but he compared that to capital growth of around $450k per year. Numbers might be slightly off, but they were what he was figuring on. To him, paying $70k p/a to get growth of $450k p/a was worth it, and obviously he must have a very good income in the first place to handle the negative cashflow.

Well yes but you need to look at what's financially better- paying 1 IP down or buying a second IP instead.
OK an example-
 You have 1 IP worth $200K and you borrow 80% ($160K). In 5 years it goes up to $300K and you have paid off (say) $50K. So you now have $190K equity ie $300-loan $110K = $190K.

OK I've assumed you've put an extra $10K per year (on top of the negative amount)

OK Instead of paying down the loan in year 3 you buy another property. So you buy another property at $200K and borrow 80%. You've saved $10K per year which pays the deposit and stamp duty etc. So that will be worth $240K in 2 years. I'm assuming you don't pay any loans down. So you have the extra 10K for the last 2 years.

So your equity is now IP 1 = $140K  (because you haven't paid anything down)
                                IP 2  = $80K
                        Total           $220K

So your equity is up $20K. The first property should now be neutral as rents would have gone up.
So it's a balancing act. I try to buy as close to neutral as possible. Buy under market. Maybe do a quick reno to increase equity and rent.
My example is in a time when CG is high. In a flat market this won't work. In that case you may be better paying down the loan. Depends what you goals are also. It's not black and white. Keep reading everything you can get your hands on. There are many ways to make money in real estate. Find what suits you.

No sure if someone has covered this …..

Some expenses that can be claimed against a property do not actually effect your cashflow. Things such as depreciation and building write off are tax deductions and can result in your property being 'negatively geared' while cashflow wise, you may not need to be actually dipping into your pocket. Negative geared does not necessarily mean cashflow negative, thats more important.

Agreed, making a loss on a property yearly via it being 'negatively geared' is not a good thing in itself. Many people are just focused on reducing their tax and forget why they are investing in the first place.