A growing number of middle-of-the-road, mainstream economists and policymakers now acknowledge that Australia has a housing bubble.

ASIC's Greg Medcraft got in early, and repeated his warning this year, but Treasury secretary John Fraser and former Liberal leader John Hewson have also used the "b-word".

While they haven't all called it a bubble, respected analysts such as Chris Richardson and Shane Oliver have basically told people they'd have rocks in their head to buy property now, especially in Sydney and Melbourne.

And, while it may have missed (or wilfully ignored) the US housing bubble, ratings agency Standard & Poor's is becoming increasingly vociferous about Australia's housing risks.

In short, we are as close as we've ever been to a consensus that Australia has a property bubble, or at least extremely overvalued markets in its two biggest cities.

But that's where the agreement between the mainstream and the housing doomsayers ends.

Property market crash or correction?

Those coming from the middle of the road predict a long period of stagnation or, perhaps, in the worst case, a 10-15 per cent price slide.

So those of us warning that a 20+ per cent crash is not only possible but increasingly likely are still a small minority.

There are two main reasons why I feel a crash is more likely than a small correction.

The first is Australia's record household debt, now around 189 per cent of incomes and more than 123 per cent of GDP.

That puts us in a podium position globally when it comes to housing and personal debts, mainly property.

It also makes households very vulnerable to any rise in interest rates, any tightening in lending standards that cuts off their access to refinancing or extra credit, any increase in other costs (such as fuel, taxes or inflation caused by a falling Aussie dollar) or any increase in unemployment.

Such an increase in unemployment is entirely plausible in a country where over-indebted households are now clearly cutting back their spending, sending several high-profile retailers to the wall less than halfway through the year.

The second factor making a crash more likely than a correction is the liquidity, or lack thereof, in the housing market.

I'm not talking about house boats here, liquidity basically means how easy it is to buy or sell when you want to.

Share markets are (usually) very liquid. There are many buyers and sellers, transaction costs are low and you can trade almost instantaneously.

Contrast this to housing.

There are always a very limited number of properties on the market compared to all the homes out there.

Selling a house usually takes months of preparation and marketing to achieve the best price and buying can take even longer due to the need to arrange finance.

Buying and selling real estate is by far the biggest transaction most households will undertake in their lives.

At a given point in time, there is necessarily a limited pool of purchasers - not least of which because the availability of loan financing is essential to almost all home buyers, while it is not for most stock traders.

While the property market is rising, no one is worried about a crash and finance is freely available - this tends to push up prices.

The easy availability of loans means the pool of buyers gets bigger, while expectations of continued price gains keep the number of sellers low.

We've seen this in the major east coast markets in the latest boom, with little stock on the market creating intense competition amongst buyers for the few properties out there and pushing prices ever higher.

But this can't go on forever. There is a finite limit to how much debt Australian households can sustain, especially with wages growth at its lowest level since at least the last recession.

When the music does stop, it will be investors in particular who feel the pinch.

Liquidity risk as the market turns

The latest Tax Office figures show 60 per cent of investment properties are making a loss - costs (including interest) exceed rent.

For the owners of these properties, the strategy is clear: offset the losses through negative gearing and hope to book a capital gain with a 50 per cent tax discount.

It's been a winning strategy for many years, but it stops working once home prices stagnate. When that happens, the investor is just left with losses (even if they are reduced through effective taxpayer subsidy).

If this stagnation lasts long enough, many investors will want to sell out - probably around the same time.

This is where liquidity risk kicks in.

While it can magnify gains on the way up, the lack of liquidity in housing markets can also magnify falls when it is due to a lack of buyers rather than sellers.

This is especially the case if rising unemployment - perhaps due to a household consumption slump and/or the end of the apartment building boom - generates a large number of forced sellers.

In an environment of stagnating or falling home prices, banks are also likely to further tighten their lending criteria, seeking bigger deposits and borrowers with stable incomes who can comfortably service their repayments.

The virtuous cycle (for some) of rising home prices suddenly goes into reverse.

Listings jump, but potential buyers are either unwilling to catch a falling knife or unable to get finance to buy, so properties sit on the market for months unsold, while asking prices are slashed.

Banks' bad debts rise as defaults increase and more of them are in negative equity - they owe the bank more than their home is now worth.

We saw it happen in the US, Ireland and Spain during the financial crisis. We've also seen it happen in Australia, in mining towns from Queensland's Moranbah to WA's Port Hedland.

To a lesser extent, we're seeing it happen right now in Perth.

It's possible the Government could step in to prevent or break such a cycle, with some new tax breaks, grants or guarantees.

The Rudd government did this with its first home buyer grant boost at the height of the GFC, and it worked a treat.

But the Commonwealth is itself treading a fine line before it loses its AAA credit rating.

Standard & Poor's has already said a housing bust would be the final straw, potentially reducing the Government's capacity to react.

If the Government gets downgraded, the major banks' credit ratings will follow, pushing up their funding costs and potentially driving interest rates higher and putting even more home borrowers into trouble.

Economic cycles are great on the way up, but the spiral back down can be very painful, especially in markets with low liquidity where the adjustment can take years, not days or months.