ABOUT 100 people gathered recently for the auction of a semi-detached bungalow in Dulwich Hill, a formerly working-class suburb about 10km from the centre of Sydney, Australia’s biggest city. The rundown property was 100 years old, with two bedrooms, peeling paint and no inside toilet. Bidding started at A$1.1m ($810,000). About seven minutes later, it sold for almost A$1.5m to a man who expects to spend even more on it: one of his adult children will live in it “after improvements”. Shad Hassen, the auctioneer, calls the sale a “cracking result”. A few hours earlier he had sold a converted community hall nearby with “work-live possibilities” for an even more eye-watering A$2.7m.

House prices in Sydney have soared by almost a fifth in the past year alone; the median is now about A$1.1m. One recent study ranks it the second-most expensive housing market in the world relative to local incomes, after Hong Kong. In Australia as a whole prices have quadrupled in nominal terms over the past 20 years, and risen by two-and-a-half times after accounting for inflation—on a par with Britain, and far more than in America. As a result, the former Australian norm of home-ownership is fading. The share of 35- to 44-year-olds who own a home has fallen from three-quarters 26 years ago to less than two-thirds.

Prices are rising in part because borrowing is so cheap. The Reserve Bank of Australia (RBA), the central bank, has kept its interest rate at 1.5%, a record low, since August. But a bigger cause is the steady rise in Australia’s population, which is growing by 350,000 a year. Immigration accounts for half of that. New dwellings are not being built fast enough to meet the extra demand. The relentless price rises, in turn, have lured speculators, whose enthusiasm compounds the problem. About 40% of new mortgages go to investors, rather than owner-occupiers. Philip Lowe, the head of the RBA, calls such loans a “financial amplifier”, further boosting prices.

Millennials are outraged by how unaffordable houses have become. When Bernard Salt, a partner with KPMG, an accounting firm, suggested in a newspaper column last year that young buyers simply needed to cut back on breakfasts at fancy cafés to afford their deposit, he was pilloried. Would-be homeowners, it was pointed out, would have to forgo 5,000 servings of “smashed avocado with crumbled feta on five-grain toasted bread”—48 years’ worth of overpriced weekend breakfasts—simply to raise a 10% deposit on a typical house in Sydney. Malcolm Turnbull’s conservative federal government made “housing affordability” a feature of its budget on May 9th. It ignored calls to abolish “negative gearing”, a tax break that allows investors to deduct from their overall income any losses they make letting out a mortgaged property. This makes investing in property in expectation of capital gains all the more alluring. Fear of annoying such investors may have played a part in the government’s decision, but self-interest may have, too. A recent analysis by the Australian Broadcasting Corporation found that about half of Australia’s 226 federal parliamentarians own investment properties. Instead the government says it will seek to boost supply. It announced plans to work with the states to make more land available for housing, starting with some surplus army land in Melbourne. It will fine foreign investors who leave dwellings empty for more than six months. And it will spend billions on urban transport, arguing that this will put more homes within plausible reach of city-centre jobs. In one respect, the property boom has been a huge economic boon, helping to perk up investment despite an abrupt crash in commodity prices which has caused new oil and mining projects to dry up. But the property market could succumb to problems of its own. The heads of both the Treasury in Canberra and the Australian Securities and Investments Commission, a corporate regulator, have warned of a housing bubble. The Grattan Institute, a think-tank, says household debt has reached a record 190% of annual after-tax income, a rise of 12 percentage points since 2015 (see chart). The Australian Prudential Regulation Authority, a financial supervisor, has sought to cool things down. It wants banks to make no more than 10% of their housing loans to investors, and to cut back on “interest-only” mortgages, which do not require any principal to be repaid until the end of the borrowing period.

The central bank frets about an “environment of heightened risks” caused by the surge in debt linked to housing. Mr Lowe worries that debt is rendering Australia’s economy “less resilient to future shocks”. He is quick to note that there is little sign of stress at the moment, and other economists maintain that Australians are culturally averse to defaulting on their mortgages. But a rise in interest rates or unemployment, or a fall in housing prices, could nonetheless prove disastrous.