Market UpdatesEconomist and former Liberal leader John Hewson recently came out saying that Australia's housing market is in a bubble caused by the "neglect and drift" of successive state and federal governments. ASIC boss Greg Medcraft recently mentioned a bubble and the Commonwealth Treasury secretary John Fraser also declaring a bubble in parts of Sydney and Melbourne almost two years ago.
Musing on housing affordability, Dr Hewson said national economic data conclusively showed evidence of a housing bubble. "House prices have gone up 250 per cent since the middle '90s in real terms.’ he said. "Household debt is more than 200 per cent of disposable income, 120 per cent of GDP, and it stands as a monument really to neglect and drift by both levels of government."
So what defines a property bubble? 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. Dr Hewson argued that prices are being driven unsustainably higher mainly by debt-fuelled speculation, rather than real supply and demand factors.
He 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," Dr Hewson told Lateline.