If Australian politics had an out-of-touch-o-meter, a lot of politicians and media pundits think it would’ve gone ding this week. Treasurer Joe Hockey’s dim platitudes on housing affordability, dished out as he publicised the government’s crackdown on foreign investment, added fuel to a debate about government policies incentivising property investment that has been raging for years. The Greens want to end negative gearing and other tax breaks, and now Labor is seemingly reconsidering its own position on the issue -- the significant budget savings are surely an attractive bonus. Way back in 2003, the Reserve Bank (RBA) tendered a submission to a Productivity Commission inquiry on first-home ownership. The executive summary noted: “The ratio of the price of the average home to average income has risen sharply … making it increasingly difficult over recent years for first-home buyers to achieve home ownership.” It sounds pretty familiar, and in the years since the inquiry prices have continued to soar to record levels. But aside from affordability concerns, there is the real threat that the current boom will lead to what most booms eventually lead to: a bust. Before we look at the risks for Australia, lets examine how housing affordability is generally measured. One of the most commonly used metrics of sustainability in home price growth is the ratio of residential property prices to household income. If the difference between the two becomes great, it can be an indicator that housing is overvalued. A 2012 RBA paper is rather critical of this approach, but it is the standard metric in reports from both the International Monetary Fund and the Organisation for Economic Co-operation and Development. Another measure compares property prices against rents, because house prices and rental yields are generally expected to track similarly if the property is correctly valued. A wide gap either way can suggest under- or overvaluation. Additionally, there are various housing affordability indexes in use around the world that also take into account external factors such as interest rates and local policy settings. The Housing Industry Association and the Commonwealth Bank jointly publish their own housing affordability index, which attempts to measure the ability of households to meet the cost of buying their first home. They claim housing is actually becoming more affordable, but then perhaps it’s best not to listen to the banks on these things. The US, Spain, Ireland and the Netherlands all experienced major housing busts -- or market corrections, if you’re an economist -- during the last decade. While the GFC affected housing markets in dozens of countries, not all crashed on the same scale. The chart below shows the astonishing housing "corrections" experienced around the world, and the opposite trend in Australia as house prices continued to rise despite small dips in 2007 and 2010.