The government faces a growing political and policy issue around property, one not of its own making but one it might be lumbered with having to fix — and wear the political consequences of. Worse, the challenges are coming from multiple directions.

First, the Reserve Bank. Its concerns about booming house prices and investment are at their highest level for years, and are likely to be articulated in its second Financial Stability Report of 2014, next week. The bank’s rising level of concern about the property boom can be seen by reading the minutes of the board meetings in the month of the release of the FSR — March and September each year –which contain a precis of the forthcoming report.

The bank’s concerns about property have considerably escalated between March 2013 and this month’s board minutes. In March 2013  property and house prices didn’t rate a mention. The minutes of the September 2013 board meeting recorded the bank’s first muted concerns, when it identified property gearing in self-managed superannuation funds “as one area identified where households could be starting to take some risk with their finances; members noted that this development would be closely monitored by Bank staff in the period ahead.” That warning was one of several from financial sector regulators about the SMSF sector’s exposure to property and banking.

By March of this year, the RBA had lifted its warnings considerably:

“Members noted that rising housing prices and household borrowing were expected results from the monetary easing that had taken place. While these factors were helping to support residential building activity, they also had the potential to encourage speculative activity in the housing market … Members noted that the recent momentum in households’ risk appetite and borrowing behaviour warranted close observation, but agreed that present conditions in the household sector did not pose a near-term risk to the financial system.”

In Tuesday’s minutes, the language had escalated again, with a long discussion of property risks.

“For investors in housing, the pick-up in housing credit growth had been more pronounced than for owner-occupiers, with investor demand particularly strong in Sydney and, to a lesser extent, Melbourne. Members further observed that additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later. The main risks in such a scenario would likely be to the stability of the macroeconomy rather than the financial system, particularly if households were to react to declines in their wealth by cutting back on their spending … Members noted that commercial property markets in Australia had also been quite buoyant recently. Australian property had been yielding higher rental returns than were available overseas, which had attracted strong demand from both local and foreign investors. This had boosted prices even though rents for some types of commercial property had declined. In contrast, demand for finance from other parts of the business sector remained subdued, although business credit growth had picked up a little in recent months.”

“We don’t build enough housing in Australia, and while that supply/demand imbalance remains, the chances of a substantial fall in property prices is small.”

There are some red flags in Tuesday’s language, likely to be repeated and explained next week — the reference to investors rather than owner-occupiers, and especially the reference to the threat to macroeconomy rather than the financial system — i.e. there’s little systemic risk to lenders, the problem is more what happens in areas like consumer sentiment and spending behaviour — already struggling given falling real wages — if a notable fall in prices prompts people to grow more cautious, perhaps inducing the first recession in 23 years. And the mention of commercial property (not mentioned in previous summaries) means the bank now sees the dangers from the booming interest in property expanding out from just housing and investor interest in that area. Traditionally Australian banks and the economy generally first feel the impact of a property bust in the commercial sector.

Meanwhile, the government faces a growing political problem around foreign investment in existing housing stock rather than new housing. Liberal backbencher Kelly O’Dwyer has been examining the issue as part of a Reps Economics committee inquiry and raised a real concern earlier this week about the Foreign Investment Review Board failing to properly administer the existing rules around foreign acquisition of residential property.

Currently FIRB is the only enforcer when it comes to ensuring foreign investment goes into new housing stock — where it is very welcome, given the continuing undersupply of housing — rather than existing stock, where it will benefit existing homeowners but potentially price Australians purchasers out of the market, especially in Sydney and Melbourne. There is much hype and nonsense around the issue of foreign, and especially Chinese, investment in existing housing but if FIRB is failing to do its job, as O’Dwyer suggests, then that’s a legitimate concern.

The fact remains that we don’t build enough housing in Australia, and while that supply/demand imbalance remains, the chances of a substantial fall in property prices is small. But the RBA correctly notes that should it occur, the damage it will inflict will spread into the broader economy, and the chances of that happening are greater now than they have been for some years.