Our Senate submission quoted extensively in the AFR today

Australia is facing a “land bubble” driven by cheap debt and a tax system that encourages property speculation, lobby group Prosper Australia has warned a Senate inquiry into ­housing affordability.

The NGO group, which focuses on economic justice, called on the inquiry to “critically reconsider” any “simple” claims that high housing prices are the result of a housing shortage. “If we are faced with a genuine mismatch between supply and demand, rents would have risen dramatically,” its ­submission said.

“They have not, except for a short period between 2007 and 2010. A solitary focus upon supply and demand is a convenient distraction from the twin determinants of land market bubbles: liberal lending standards and non-taxation of land.”

The current tax regime – low property and land taxes and inefficient stamp duties – encourages land-owners to extract an economic rent from their property by capturing the uplift in land values, it said.

Australia has the highest rate of tax expenditures relating to the housing market – including exemptions, deductions and offsets – compared with other OECD peers.

Those tax expenditures provide a strong incentive to speculate on housing prices and are reinforced by already low property taxes, it said.

“Investors perceive rental income as secondary to expected rises in capital prices, while first home buyers over-leverage themselves to enter a bubble-inflated market.”

Prosper Australia said residential property is commonly seen as “a speculative asset to flip, rather than shelter to raise a family in”.

“The behaviour of Australians is profoundly influenced by irrational exuberance, amply demonstrated by a large cohort of negatively geared property investors; overwhelmingly middle-income earners seeking to escape the PAYE tax system.”

The group has called for reform of the states’ land tax systems, along with the introduction of a 1 per cent federal land tax, which is rebatable on state land tax paid.

Prosper Australia has added to recent calls for macro-prudential reforms to restrict highly geared ­residential lending.

Reserve Bank of Australia board member John Edwards last week flagged the prospect of a cap on lending as a means to stem house price growth.

That came after RBA governor Glenn Stevens warned housing was not the fail-safe investment many Australians believed it to be.

The current land bubble is centred on residential land rather than structures, Prosper Australia said.

It is the largest on record and follows bubbles in the 1830s, 1880s, 1920s, mid-1970s and late 1980s, according to the group, who gives evidence to the inquiry on Tuesday.