The Australian real estate market is in the grip of the biggest housing bubble in the nation's history and Melbourne will be at the epicentre of an historic "bloodbath" when it bursts, according to two housing economists.
Lindsay David and Philip Soos, who have authored books on the overheated housing market, have berated the housing industry and politicians who refuse to acknowledge the existence of a bubble due to a perceived shortage of housing in the major capitals.
In a blunt submission to the upcoming parliamentary inquiry into home ownership, the pair claim there is actually an oversupply of housing, just as there was in the United States just before the market collapse that precipitated the global financial crisis.
And the largest oversupply is in Melbourne, where they forecast available homes outstrip demand by 123,000.
"Contrary to the analyses of the vested interests, the data clearly establishes Australia is in the midst of the largest housing bubble on record.
Policymakers are caught between a rock and a hard place, as implementing needed reforms will likely burst the bubble," Mr David and Mr Soos state in a submission on behalf of real estate and financial services research house, LF Economics.
They believe the current bubble is worse than those in the 1880s, 1920s, mid-1970s and late 1980s.
"Australian economic history and recent international events illustrate collapsing housing bubbles can quickly increase the number of unsold properties (stale stock), shattering the pervasive myth of a deleterious dwelling shortage," they wrote.
"Should this occur alongside rising unemployment and underemployment, reduced aggregate demand and falling net overseas migration, the combination of declining population growth and an oversupply of investment properties would place further downwards pressure on rental prices. Falling housing and rental prices, including sales, would be a doomsday trifecta for investors as they suffer losses in both capital prices and net rental incomes.
"This calamitous outcome is especially likely in Melbourne where rents have not increased in real terms since 2010. Melbourne is primed to become the epicentre of a legendary housing market crash due to the combination of a staggering boom in real housing prices (178 per cent). Perth is also in a serious predicament."
"Housing prices across all capital cities remain grossly inflated relative to rents, income, inflation and GDP.
What event or set of events triggers the beginning of the end of the housing bubble is not yet known.
A bloodbath in the housing market, however, appears a near certainty due to the magnitude of falls required for housing prices to again reflect economic fundamentals.
The largest residential land market bubble on record is truly incomparable and dwarfs earlier speculative episodes in the commercial and industrial land market."
Treasurer Joe Hockey sparked a national debate on house prices this month when he rejected the existence of a bubble, saying people would not be buying houses if they were unaffordable.
His statements directly conflicted with his departmental head John Fraser and some warnings by Reserve Bank of Australia governor Glenn Stevens.
But Mr David and Mr Soos believe even the most bearish officials underestimate the coming collapse that has been made worse by rampant lending practices.
"What these housing markets experienced was artificial demand generated by their banking and financial systems, having lent colossal sums of private debt to speculators to bid up housing prices which led to the entry of ever-more buyers.
It is during this period these institutions claim a dwelling shortage is the cause of record high housing prices.
The failure of the RBA and government to identify the oversupply of mortgage debt in the household sector as the real culprit has now left the housing market and economy exposed to financial instability and a severe downturn," they said.
Among their recommendations to cool the market are state land tax, which they say has been "rendered comatose by a host of exemptions and concessional treatments". The federal government could also impose a land value tax.
The home ownership inquiry begins on Friday.
Treasury, the Department of Prime Minister and Cabinet and the Department of Social Services are scheduled to appear.