YOU can’t blame people for being confused.

One minute we are told there is an apartment glut and house prices could crash any minute. The next, our leaders are calling for negative gearing changes that will push prices down even further. So are we headed for housing armageddon or not?

PRICES ARE TOO HIGH ...

Housing prices have been rising for over a decade and warnings about a property bubble have been brewing for years.

One of the latest warnings came last month from property analyst Louis Christopher, of SQM Research, who said the national property market was overvalued by 22 per cent.

This is being driven by prices in Melbourne, which hit its highest overvaluation level of 40 per cent and Sydney, which was at its second highest level of overvaluation at 40 per cent.

Mr Christopher warned that if changes weren’t made, such as lifting interest rates or tougher restrictions on home lending, prices in Sydney and Melbourne would continue to rise by up to 16 per cent in 2017.

“However it is likely 2017 will be the last year of price falls generated by the mining downturn for these cities,’’ he said.

Mr Christopher said if interest rates were cut again, prices would rise even further, paving the way for a possible correction in 2018.

BUT THERE’S AN APARTMENT GLUT COMING ...

At the opposite end of the spectrum, there are fears that construction of new apartments will lead to an oversupply in the next few years.

The construction boom already seems to be impacting Melbourne apartment prices, where there’s been record levels of building in the last two years.

On Thursday, Corelogic’s November Hedonic Home Value Index showed Melbourne dwelling prices had fallen by 1.5 per cent.

Head of research Tim Lawless attributed this to new units coming on to the market. Prices for units fell by 3.2 per cent last month.

Overall, prices for Melbourne units have only grown by 3.9 per cent this year, compared to 12.2 per cent for houses.

But this is where things get really interesting for Sydney.

While Sydney unit prices are not increasing as fast as those for houses, they are still rising.

In November, unit prices increased by 0.9 per cent, which was actually slightly higher than 0.8 increase achieved by houses.

Across the year, unit prices grew by 10.6 per cent compared to 15.3 per cent for houses.

Earlier this year BIS Shrapnel released a report that predicted Melbourne would have an oversupply of more than 20,000 homes by 2017, but managing director Robert Mellor said Sydney was still suffering from an undersupply of housing.

“It’s so severe we won’t see an oversupply in Sydney in the next four years,” Mr Mellor said at the time.

“A downturn in Sydney between 2004 and 2012 was so severe, basically only in the last 12 months we’ve started to see construction move above the level of demand.”

SYDNEY IS DIFFERENT

Prices in Sydney have outstripped those in other areas and it remains Australia’s most expensive city, with a median dwelling price of $845,000, according to the latest statistics released by Corelogic.

Since 2009 dwelling prices in Sydney have risen by a staggering 96 per cent, Corelogic head of research Tim Lawless told news.com.au.

Melbourne is not that far off, with growth of 78 per cent, but the next best performing market after that was Canberra, which has only seen growth of 33 per cent.

The difference was even more stark in Perth, which only grew by 6.5 per cent, and Hobart on 4.5 per cent.

Mr Lawless said Sydney’s astronomical growth had been achieved against the backdrop of record low wages growth of about 2 per cent.

“So the byproduct of strong capital gains (for housing) and relatively low income growth is that affordability is becoming stretched,” he said.

One way of measuring housing affordability is to look at the dwelling price to income ratio.

In Sydney this ratio is 8.4, which means it takes 8.4 times the typical household salary to buy the typical Sydney dwelling.

If you look at houses only, this ratio is closer to 10, while for apartments it is 7.1.

These figures are still higher than in other cities.

Melbourne has a ratio of 7.2 for dwellings, while Brisbane’s ratio is 5.7.

“It highlights that Sydney is becoming increasing unaffordable,” Mr Lawless said.

However, Mr Lawless said there was some confusion in the market because the measure of “serviceability”, the proportion of household income that goes towards paying a mortgage, which has been really flat because of record low interest rates.

“This hides the fact that dwelling prices have risen at a substantially higher rate than incomes in Sydney and to a lesser extent, in Melbourne.”

A TARGET FOR INVESTORS

All the analysts seem to agree on one thing — the Sydney real estate market is different and property prices in other areas are not growing as strongly.

This may be why NSW Planning Minister Rob Stokes, called for reform of negative gearing this week.

His comments were later backed by NSW Premier Mike Baird, who said changes should be considered. But this is in direct conflict with Liberal Party policy.

During the election Prime Minister Malcolm Turnbull said the coalition would not change the measures, and warned Labor’s policy to reform negative gearing and the capital gains tax discount would lead to price falls. Estimates have ranged from between two per cent to as high as six per cent.

Mr Turnbull pointed to the need to increase housing supply to improve affordability.

But in his speech, Mr Stokes said supply alone wouldn’t solve Sydney’s housing affordability problem.

The state is currently building 185,000 homes over the next five years to try and address an undersupply of close to 100,000 homes in NSW.

But with interest rates at record lows and generous federal tax incentives, Mr Stokes said Sydney had become a prime target for investors.

Property investors can use negative gearing to reduce the tax they pay if they make a loss, for example if the rent they collect is less than their mortgage repayments.

Once they sell the property, they only pay tax on half of the profit because of the capital gains tax discount.

Mr Lawless said statistics showed investors currently made up more than half the demand for mortgages in NSW.

States are now trying to wind back incentives for investors.

This year NSW introduced higher taxes on foreign investors buying residential property, following in the footsteps of Victoria and Queensland.

HOUSING MARKET IS STILL HOT

AMP chief economist Shane Oliver said NSW must think there’s still some extra capacity in the property market as the state planning minister probably wouldn’t be talking about negative gearing if the market was weaker.

“They are probably thinking there is still room in the market as it’s not altogether clear that the market has peaked,” he told news.com.au. “They are probably thinking there’s a long way to go.

“I would be more cautious, I think a supply glut could hit next year,” he said.

However, if prices did fall, Mr Oliver said the market could still be propped up by two types of buyers.

Firstly, first home buyers may re-enter the market, especially if prices fell by 20 per cent and interest rates remained low.

Ironically foreign investors could also be lured by lower prices and move to snap up a bargain. Prices in Sydney are still reasonable compared to those overseas, especially because the Australian dollar is quite low at the moment.

Population growth in Sydney also remains strong and this would also cushion the market against a big fall. Mr Oliver said he didn’t think any price falls would go beyond 15-20 per cent.

“You wouldn’t be looking at a fall like what happened in the US or eurozone.”

SO SHOULD THEY CHANGE NEGATIVE GEARING?

By restarting the debate on negative gearing, NSW is basically trying to push some of the responsibility for fixing housing affordability back on the Federal Government.

While Mr Oliver believes supply is more connected to affordability, this doesn’t mean some changes shouldn’t be looked at — especially the capital gains tax discount.

“This is a bit of a distortion and that’s what makes negative gearing so profitable,” Mr Oliver said.

But Treasurer Scott Morrison did not seem to be taking the bait, and said on Friday that abolishing negative gearing would hit mum-and-dad investors in rental properties, pushing rents up and putting immense pressure on the market.

Another tricky thing about changing negative gearing and the capital gains tax discount, is that the measures would impact property markets around Australia, not just Sydney.

Meanwhile, Housing Industry Association chief executive Graham Wolfe pointed to the state taxes and levies charged on the sale of every new home.

“State-based stamp duty on the purchase of a typical new home alone adds a $91 per month burden on household mortgage repayments,” Mr Wolfe said.

Stamp duty is something the NSW Government could change to help first homebuyers but has left untouched.

In his speech, Mr Stokes said if states were to consider getting rid of inefficient state taxes, the Federal Government needed to outline how it would help states raise money for schools and hospitals to cater to a booming population.

Providing investors with generous tax breaks such as the capital gains tax discount, costs the Federal Government billions. In 2014/15, the CGT alone was estimated to have cost the federal Budget more than $6 billion.

And despite all the talk of housing bubbles, apartment gluts and falling rental prices, this hasn’t deterred investors.

ABS housing finance data has shown a consistent rise in finance commitments for investment purposes since May this year.

“Clearly investors are continuing to see housing as the preferred investment option, despite low yields and a mature growth cycle,” Mr Lawless said.

Mr Stokes believes it’s time for a real debate about policies and for the Federal Government to partner with states to address housing affordability.

“Why should you get a tax deduction on the ownership of a multi-million dollar holiday home that does nothing to improve supply where it’s needed?” he said.

“We should not be content to live in a society where it’s easy for one person to reduce their taxable contribution to schools, hospitals and other critical government services — through generous federal tax exemptions and the ownership of multiple properties — while a generation of working Australians find it increasingly difficult to buy one property to call home.”

charis.chang@news.com.au