Australia’s housing market is definitely in a bubble, according to economist and former Liberal leader John Hewson.

Speaking as part of a panel during a Lateline special on housing affordability, Hewson said national economic data conclusively proved that the market was in a bubble. Hewson, who was federal leader of the Liberal Party of Australia and leader of the Opposition from 1990 to 1994, said the bubble was caused by a combination of “neglect and drift” by successive state and federal governments.

“House prices have gone up 250 per cent since the middle '90s in real terms. Household debt is more than 200 per cent of disposal income, 120 per cent of GDP, and it stands as a monument really to neglect and drift by both levels of government,” Hewson said.

Hewson, of course, is not the first prominent individual to say the country was in the midst of a property bubble. ASIC Chairman Greg Medcraft used the term almost two years ago and repeated it earlier this week. Commonwealth Treasury Secretary John Fraser also said that parts of Sydney and Melbourne were in a bubble almost two years ago.

In line with many economists, Hewson argued that property prices were being driven to unsustainable levels by debt-fuelled speculation, rather than by real supply and demand factors.

A reduction in the gains investors could reap from a combination of capital gains tax concessions and negative gearing should be implemented to cool the housing market, Hewson said. Such measures would also book up to $10m in additional revenue to close the federal government’s budget deficit.

“In those circumstances, it makes sense to contemplate doing both negative gearing and capital gains tax, but probably grandfathering them so you [can] phase them in over time,” he said.

The Labor Opposition has proposed a similar policy, including halving the CGT discount to 25% and allowing negative gearing to be used only for newly constructed dwellings, while grandfathering the old system for existing investments.