"The question for responsible policymakers is whether there are enough vulnerable people that when interest rates do go up there is a major impact on the whole of the market," he said.



"If rates do go up, the investor with multiple properties will find it as difficult as the newcomer with limited income to fund their losses. The home owner-occupier highly geared who has to pay their interest with after tax-dollars is even more disadvantaged."

Not like the US

Leading economist Saul Eslake said property prices were undoubtedly high but there was no "imminent danger" of a collapse akin to the sub-prime crisis in the US.

"There hasn't been, unlike the United States, a whole lot of lending to people with no income, no job or assets," he said.

"Instead, most Australian mortgage borrowers have been using the period of exceptionally low interest rates to pay down their outstanding principal more quickly than they have to, and as a result have built up considerable buffers against the prospect of future increases in interest rates which have to happen at some point even if it's unlikely in the near term."

Mr Eslake said there had been a surge in housing supply.

"Although approvals by local government appear to have peaked late last year and now levelling off, such is the back log of of work to be done on projects yet to be finished, particularly apartments for which the lead times are much longer than traditional detached dwellings, there is no doubt that dwelling investment will contribute significantly to economic activity over at least the next couple of years."

RBA veto idea


The Reserve Bank of Australia left interest rates on hold at 2 per cent on Tuesday.

Mr Alexander has proposed giving the RBA the power to set the rates at which property investors can deduct net rental losses, or negatively gear​, against other income.​

The idea is the bank would announce, in parallel with interest rate decisions, a rate of deductibility ​that would serve to either cool or heat the housing market.

"Consideration should be given to grant the RBA with a control lever to counterbalance the effects of the setting of interest rates," Mr Alexander said.

"Therefore, much as they control the rate of inflation, this mechanism could moderate dangerous spikes and stimulate as required.

"It is vitally important that any measure considered must be able to cope not only with current concerns but also foreseeable events."

Labor plans to limit negative gearing to new housing and halve the capital gains tax discount. Mr Alexander said the proposal would "so spook the horses; it would cause a stampede."

On the possibility of a $20,000 limit to negative gearing, he said: "It would need to be reviewed constantly it needs to be able to be calibrated."