At the auction of a four-bedroom period home in inner-city Melbourne, a heated bidding war ended with an offensive remark by a spectator. The local man in his 60s yelled at a Chinese family bidding for the $2.7 million property: "Have you go the appropriate residency?"

The Abbott government is cracking down on breaches of foreign investment rules that prevent non-residents buying established homes without approval.

'Isolated incident'

Marshall White auctioneer Antony Woodley said the Melbourne incident was sad. "I think it was an isolated incident because I haven't seen it before," he said.

"There's a misconception from the public about Asian buyers because they read the sensationalism in the papers. The majority of them are normal buyers like any families who want a good home."

Race Discrimination Commissioner Dr Tim Soutphommasane said he has been monitoring the tension between foreign and local property buyers and said Australians should not be complacent about the incident in Mont Albert.

"It's unfortunate that some xenophobia has been unleashed by rising anxiety about property prices and housing affordability," he said.

"We should have a proper property debate about the various factors at play. It's overly simplistic to blame foreign buyers for the situation in the property market.


"Incidents like Mont Albert could be temporary but we have to be careful such sentiments do not undermine Australia's long-term attractiveness to foreign investment."

As well as spearheading the crackdown on foreign investors, Treasurer Joe Hockey has directed the Standing Committee on Economics to examine home ownership.

Treasury backed Fraser

Ms Wilkinson said Treasury stood behind Mr Fraser's evidence last month that there was "unequivocally" a housing bubble in Sydney and parts of Melbourne, but she did not use the word bubble. Ms Wilkinson said building approvals had increased by more than 16 per cent in the year to April 2013.

Further, government forecasts were for a 6.5 per cent increase in dwelling investment this year and next, followed by 4.5 per cent in 2016-17. She said the fact construction workers had been pulled onto mining projects in recent years may have been a factor in reducing the supply of new homes.

"Supply does seem to have been somewhat constrained, partly potentially [by] the availability of labour, but also it looks to have been constrained by land release," Ms Wilkinson said.

"Our sense is that the current upswing in activity will certainly improve the balance between demand and supply."

Labor MPs Ed Husic and Jim Chalmers asked whether Treasury had done any modelling on the impact of negative gearing on the housing market or on using superannuation to help first home buyers. The answer to both questions was no.

Property Council of Australia chief executive Ken Morrison said foreign investment was the solution to Australia's high property prices.

"A new home purchased by a foreign investor enables up to four others to be built, adding to local supply," he said.