Australia's housing market is in a bubble caused by the "neglect and drift" of successive state and federal governments, economist and former Liberal leader John Hewson has concluded.
Speaking as part of a panel during a Lateline special on housing affordability, Dr Hewson said national economic data conclusively showed evidence of a housing bubble.
"I think it's a crisis, it is a bubble. I know people are hesitant in saying that, it is a bubble," he said.
"House prices have gone up 250 per cent since the middle '90s in real terms.
"Household debt is more than 200 per cent of disposal income, 120 per cent of GDP, and it stands as a monument really to neglect and drift by both levels of government."
Dr Hewson is not the first one to declare Australia has a property bubble, with ASIC boss Greg Medcraft using the term almost two years ago and repeating it earlier this week, and the Commonwealth Treasury secretary John Fraser also declaring a bubble in parts of the Sydney and Melbourne market almost two years ago.
A bubble is where investors drive prices higher due to expectations of future capital gains, rather than the income generated by an asset, such as rental from a house or unit.
Negative gearing, CGT changes would slow investor demand
In the case of Australian housing, Dr Hewson argued that prices are being driven unsustainably higher mainly by debt-fuelled speculation, rather than real supply and demand factors.
Dr Hewson said a reduction in the benefits investors can gain from the combination of capital gains tax concessions and negative gearing should be implemented to both cool the housing market and book up to $10 billion in extra revenue to close the Federal Government's budget deficit.
"It will work in the direction of slowing the investor demand for housing, which has been a major reason I think demand has outstripped supply and, in those circumstances, it is something that should be done," he told Lateline.
"In terms of a world where the budget is in deficit $100 billion over the budget period, those sort of savings are significant.
"In those circumstances, it makes sense to contemplate doing both negative gearing and capital gains tax, but probably grandfathering them so you phase them in over time."
The Labor Opposition has proposed such a policy, including halving the CGT discount to 25 per cent and allowing negative gearing to be used only for newly built dwellings, while grandfathering the old system for existing investments.
The Government has previously ruled out such changes, but there has been continued speculation that some tinkering with those two tax breaks may be included as part of a housing affordability packaged that has been promised for this year's budget.
'Very significant problem' if you burst the bubble
Stephen Koukoulas, who runs consultancy Market Economics and was an economic advisor to former prime minister Julia Gillard, said he does not believe that limiting negative gearing or reducing the capital gains tax discount would see prices drop greatly.
"It is important that we remove one of the areas, if you like, artificial demand for housing from the investor base who are merely doing it to minimise their tax and hoping they get a capital gain," he told Lateline.
"So, if you change those tax rules, you would certainly remove some of the demand for housing and you would put downward pressure on prices from those tax changes.
"How much depends on the other things - interest rates, immigration levels."
However, John Hewson said caution is needed in unwinding property investor tax breaks, and any other changes that will affect property prices.
"If you hit house prices hard, for example, you can burst the bubble and cause a very significant problem," he warned.
"The herd, people get on it and pull out of the housing market and cause a crisis."
Another tax policy change at the state level which Dr Hewson thinks would be beneficial is the replacement of stamp duty on property with a broad-based land tax on all property.
"If we can move away completely from stamp duties towards a broad-based land tax that is the way to go," he added.
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