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Photographer: Brendon Thorne/Bloomberg Photographer: Brendon Thorne/Bloomberg

Australia is experiencing a “spectacular housing bubble” which needs to be addressed with tougher regulatory measures, said Willem Buiter, Citigroup Inc.’s chief economist.

A shortage of housing, coupled with record-low interest rates, has made Sydney the world’s second-most expensive property market. The city’s home prices jumped 16 percent in the 12 months through April, helping stoke record household debt and putting ownership increasingly beyond the reach of many.

"It had better be focused on immediately, to try and tether a soft housing landing,” Buiter told reporters in Sydney Wednesday. “Clearly if these things are not managed well they can be a trigger for a cyclical downturn.”

Australia’s biggest banks have been tightening their lending standards under pressure from regulators, making home loans for investors and interest-only mortgages more expensive relative to traditional loans for owner-occupiers.

There are signs the heat may finally be coming out of the Sydney and Melbourne markets. Data due Thursday is expected to show a monthly decline in prices for May, after increasing at the slowest pace in 16 months in April.

The Reserve Bank of Australia has cited the east-coast property markets and their impact on financial stability as a key concern. While it’s reluctant to cut the benchmark interest rate from 1.5 percent and stoke prices even higher, lifting borrowing costs would place a greater burden on households saddled with debt already at 189 percent of gross domestic product.

Buiter also warned that a downturn in China, as he is forecasting, would impact on Australia more than any other developed economy due to its dependence on commodity exports.

"The good news for Australia is of course that its performance is the best of any advanced economy,” he said. “You still have a little bit of monetary policy elbow room left and, as far as I can tell, a lot of fiscal elbow room left."

Buiter urged the country to do more to boost its infrastructure pipeline, and ensure there was a long list of “shovel-ready” projects to cope with any downturn.



— With assistance by Emily Cadman