On the same day Australia's top economic bureaucrat accepted there's a property bubble, our PM unwittingly identified the biggest barrier to affordable housing - home owners. Michael Janda writes.

Australia's Prime Minister has unwittingly identified the biggest barrier to affordable housing - home owners.

The nation's top economic bureaucrat, Treasury secretary John Fraser, yesterday said "unequivocally" that Sydney and parts of Melbourne have a property bubble.

It's an unprecedented admission from Australia's economic leadership, one which the Reserve Bank's assistant governor Malcolm Edey didn't want to repeat, but also declined to refute.

While it is stunning that Australia's financial mandarins - who have previously stayed away from scaring the punters with the "b" word - are finally calling a spade a spade, it's the Prime Minister's response to Mr Fraser's comments that's really telling.

Asked during question time whether he agreed with the Treasury secretary, Mr Abbott appeared to put self-interest firmly above national interest.

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"As someone who, along with the bank, owns the house in Sydney, I do hope that our housing prices are increasing," he replied in a refreshingly truthful admission for a politician.

In that sentence, Mr Abbott summed up everything that's gone wrong with Australian housing policy over the past three decades.

Financial deregulation combined with favourable tax policies that encourage large debts have resulted in people being willing and able to take on ever larger mortgages, in many cases on multiple investment properties in addition to their own home.

That has seen Australia's household debt balloon out to a record 153.8 per cent of income.

Most independent housing economists - those not employed by developers, banks or real estate agents - have long agreed that something needs to be done to reduce the incentives for over-investment in property.

Whether it is reducing the capital gains tax discount, winding back negative gearing or bringing in a broad-based land tax, there is plenty the Federal Government can do.

On the banking front, the Government's own Financial System Inquiry, chaired by former Commonwealth Bank boss David Murray, recommended an increase in the amount of capital that the major banks need to hold to safeguard against home loan losses, which would push up the cost of mortgages.

However, with about two-thirds of Australians owning or paying off property and many mortgaged up to the hilt, self-interest has dominated.

A recent study of the Federal Parliament's declaration of interests register by analysts Lindsay David, Philip Soos and Paul Egan showed that imperative is even more pronounced in the political class than the voting public.

The 226 members across both houses owned a total of 563 properties between them - only 13 didn't have property.

The two men in charge of Australia's fiscal policies, Joe Hockey and Mathias Cormann, owned five and four properties respectively, with both paying off mortgages on at least some of those.

Is it any wonder that neither major political party has pursued with any vigour taxation reforms that might limit property price rises, let alone made efforts to send prices lower?

Politicians on both sides have talked the talk of affordable housing. Mr Abbott did so again yesterday.

"I want housing to be affordable but nevertheless, I also want house prices to be modestly increasing," he said.

But that statement is an inherent contradiction.

With the typical Sydney home now selling for 10 times median annual income, and 6.7 years of saving required for a couple to put aside the $165,000 20 per cent deposit for a mid-priced property, there is no question that affordability is awful in Australia's biggest city.

But Australia's other cities aren't that far behind.

The only way affordability can sustainably improve is by incomes growing faster than home prices.

Wages currently are growing at just 2.3 per cent per year nationally, so home prices should also be growing around that pace just to keep affordability standing still.

At the current level of wage growth, it will take home price falls to make any real dent in the affordability crisis.

So if the current Government, or a future one, is serious about improving housing affordability it needs to either ensure that working people get better pay rises or enact policies that will cause home prices to fall - hopefully at a modest, rather than catastrophic, pace.

The solutions put forward by Mr Abbott yesterday are twofold.

"This Government is trying to make housing more available," he told Parliament.

This is a logical proposition on a basic economic supply-demand analysis.

All else being equal, more homes on the market should make them cheaper, but this would run counter to Mr Abbott's expressed preference for rising prices.

The examples of Ireland, Spain and the United States showed what can be achieved for housing affordability by engineering an oversupply.

Unfortunately, so many people lose their jobs in the crash that few people can afford to pay even the firesale prices, and thousands of relatively new homes sit empty for years or are even demolished.

The other suggestion is a fallacy.

"The best way to make housing more affordable is to keep interest rates low and stable and that is exactly what is happening," Mr Abbott said.

Record low and stable interest rates are precisely the reason housing has become less affordable, as investors simply factor their lower borrowing costs into paying higher prices for properties.

Moreover, it is the pitiful returns on safer savings vehicles, like bank deposits, that are quite rationally driving many investors into the housing market, even though rental yields are scarcely better and (after the various costs of owning a rental property) are lower in many locations.

Current rates are the result of still sick global economies and tired domestic ones, and the good news will be when the Reserve Bank actually has enough confidence to raise them.

Except that when those rate rises become necessary, hundreds of thousands of over-leveraged property investors may hit the wall.

Australia has set itself into a trap from which there seem few escapes.

If the economy continues to worsen, even though rates will stay low, more people will lose their jobs, housing defaults will rise and prices will fall as forced sellers come on the market.

If the economy improves, rates will rise and many investors and owner-occupiers will be forced to sell when they can't afford the higher repayments.

The best policy approach would have been for the Government to offset record low interest rates by rolling back some of the incentives to borrow money to buy housing, such as the capital gains tax discount or negative gearing.

However, with the bubble already inflated in Australia's biggest markets, the opportune time may have passed.

Michael Janda is an online business reporter with the ABC.