A Nobel Prize laureate has cautioned that Sydney and Melbourne's real estate markets are showing indications they are in a housing price bubble.
The 2002 awardee, Professor Vernon Smith, told the ABC that the country needs to learn lessons from the subprime mortgage bubble in the United States which resulted in a housing crash and the subsequent global financial crisis.
"Sydney real estate is growing faster than your other cities and Melbourne has a similar experience," Smith said.
“In so far that it's investors speculating and wanting to resell at a profit, some of them are going to be disappointed when things turn around. But free economies involve losses. If you're not willing to take the losses you can't really brag about the gains.”
Smith, however, believes Australia can still avoid the worst parts of the housing crash the US saw in 2007.
"Households then had a severe balance sheet crunch, many were living in homes where they owe more than the home is worth," he said.
"You don't feel like spending money because you're in debt reduction mode and the banks are in trouble because they're holding those bad assets. If you can avoid that sort of thing then you've got a softer possibility for adjustment when prices come down."
Smith was awarded the Nobel Prize for his work in experimental economics.

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