There is a growing mountain of evidence that Australia has fundamental housing market problems, and the nature of those problems is clear.

After a scant mention in the Reserve Bank governor's post-meeting statement on Tuesday, a speech yesterday by the head of the bank's financial stability department, Luci Ellis, made it plain that the RBA is still worried by current property price rises in Sydney and Melbourne.

Dr Ellis also made it clear that the cause for the price spike is property investment, which now makes up close to half of all new home lending even though private renters make up just a quarter of households.

"That share is noticeably higher than rental housing's share of the housing stock, even allowing for a possible faster rate of churn in investor loans. Obviously that can't continue forever," she told a conference on financial stability.

The bank has repeatedly acknowledged that a boost in property investment is an expected outcome of low interest rates.

However, it perhaps underestimated just how much property investment, and home prices, would jump by not focussing enough on two other factors.

Foreign investment boom

The first is foreign investment.

The RBA has fairly consistently downplayed this segment of the market, relying on Foreign Investment Review Board approvals numbers to show it is relatively small.

The problem with this analysis is that those annual numbers - already undermined by their lack of timeliness - have now been all but completely discredited by the House of Representatives Economics Committee.

Its inquiry into the rules around foreign investment into residential real estate revealed that FIRB only has eight staff monitoring this area, and that it relies almost totally on the honesty of the buyers to submit an application.

That means there are an unknown number of foreign investors in the market buying and owning residential property not captured in the figures.

Surveys of the real estate and development sectors consistently show the foreign buyer influence is high, particularly in Sydney and Melbourne.

The latest this week from the Australian Property Institute (API) found 96 per cent of industry players rated foreign investment a "significant driver" of residential property demand and prices in Sydney - more than half of those said it was "very significant".

The results were only slightly lower in Melbourne, with 95 per cent saying it was significant, including 41 per cent who said it was "very significant".

A lower proportion said foreign buyers were significant in Brisbane and Perth, but it was still over half the respondents.

The respondents to this survey should have a fairly good idea - they included three of the four major banks, some of the world's biggest real estate agencies (including CBRE and Colliers), as well as major developers Lend Lease and Mirvac.

Negative gearing tax breaks

The same survey exposes the other major driver of the recent residential property price surge - negatively geared investors.

In Sydney and Melbourne, nearly two-thirds of respondents saw negative gearing as a "significant driver" of demand and prices although, unlike foreign investment, none saw it as "very significant".

Interestingly, respondents saw negatively geared self-managed super funds as even more significant in driving price rises in these two markets.

The use of negative gearing has allowed investors to flood the market in record numbers despite very low rental returns.

The latest national RP Data figures show zero rental growth for houses in the September quarter and a 1.3 per cent fall in apartment rents.

In the markets where property prices are booming, Sydney and Melbourne both recorded flat unit rents and a 1 and 2.6 per cent rise in house rents respectively.

Given the concentration of the investment boom in inner-city apartments in those two cities, it is not surprising the flood of extra rentals on the market is starting to push down rents.

Negative gearing, combined with record low interest rates, has allowed investors to borrow large amounts and accept very low gross rental returns while waiting for a capital gain.

Debt outpacing housing supply

The problem that the Reserve Bank confronts is that all this investment is resulting in a lot of extra debt - Australia's housing debt to income ratio recently hit a fresh record - but relatively little extra housing supply and economic activity considering all the money borrowed.

"Part of the anticipated effect of monetary policy is to induce more construction activity. Higher prices are the incentive to get that expansion, which is indeed happening," Dr Ellis said.

"But it is worth noting that the vast bulk of that new borrowing is to purchase existing properties."

Investors have gradually moved further away from buying newly built housing.

Lack of supply being rated as the third main factor driving up home prices in the API survey, this adds to the concern of a lengthy boom, leaving Australia vulnerable to a housing bust.

That is why the Reserve Bank recently told a Senate committee that "something will be done" to limit more risky investor lending.

However, such loans limits are merely a band aid that may help limit the supply of investment loans, but will do nothing to dent the demand for them.

Where there is unmet demand, there will surely eventually be some form of shadow banking or regulatory workarounds that spring up to fulfil it.

For a long-term solution to Australia's high and rising, it is up to the Federal Government to address the key drivers of surging investor demand.

The first area is acting on the Economics Committee's likely recommendations around stricter enforcement of Australia's foreign investment regime to ensure that overseas buyers are adding to, not soaking up, the housing stock.

The second area is to tighten or close the negative gearing and capital gains tax discount breaks that interact to allow investors to subsidise losses before enjoying a low-taxed capital gain.

Luci Ellis says there have been fundamental changes to Australia's financial system that justify current housing prices and make a large correction unlikely.

"Australia went from being a high-inflation country to a low-inflation country in the early 1990," she explained.

"One result of that was that average nominal interest rates fell, and so the sustainable amount of debt rose relative to income - permanently.

"People should therefore not expect ratios of housing prices or debt to income to revert to their long-run, multi-decade averages."

Dr Ellis is right, but ignores the key policy changes, especially the capital gains tax discount, that are also now factored into higher prices.

If those policies do change, a significant correction could follow.

If they do not, the rampant investor demand that has led to the latest price boom is unlikely to be halted by tighter lending rules alone.