Australia, a nation long accustomed to property booms, has reached a new milestone: home prices are now the highest in the world relative to incomes. The response from Canberra? A proposal to scrap tax breaks that have fuelled the market for decades. But in the City of London, where we know a bubble when we see one, this feels less like a solution and more like a controlled demolition.

Let’s cut to the numbers. According to Demographia, the median house price in Sydney is 13.8 times the median income. That’s not just high; it’s astronomical. For context, London sits at around 8.6 times, and even that is considered stretched. Australia’s property market has been inflated by a cocktail of low interest rates, foreign capital, and generous tax concessions, particularly negative gearing and the capital gains tax discount. Negative gearing allows landlords to offset rental losses against their income, while the 50% capital gains discount for assets held over a year encourages speculation. The result? A market where investors outbid first home buyers, and the dream of homeownership becomes a distant fantasy for a generation.

The proposal to scrap these breaks is being positioned as a fairness measure. “We need to level the playing field for young Australians,” said Treasurer Jim Chalmers. But let’s not kid ourselves. The political calculus here is desperate. With inflation sticky at 4.1% and the Reserve Bank of Australia holding rates at 4.35%, the pressure on households is immense. Mortgage stress is at a two-decade high, and the government is scrambling to show it’s doing something. However, scrapping tax breaks is a double-edged sword. On one hand, it could cool demand and bring prices back to earth. On the other, it could trigger a capital flight nightmare.

Consider the consequences. Australian property has been a safe haven for local and international investors alike. Remove the tax incentives, and you remove the prop. Capital gains discounts and negative gearing have been baked into the investment thesis for years. Without them, the yield on residential property looks less attractive compared to equities or bonds. The risk is a sudden exodus of investor capital, which would hit prices hard. And in a market where household debt to income is 211%, a 10% correction could wipe out equity for millions and tip the economy into recession.

But here’s the irony: the government might not have a choice. The global bond market is watching. With the US election looming and the Fed signalling higher for longer, Australian government bond yields have spiked to 4.6%, making debt servicing more expensive. The country’s fiscal position is not as rosy as it once was, with net debt projected to hit $1.2 trillion by 2027. If investors start to question the sustainability of Australia’s housing model, they might demand a premium for holding Aussie bonds. That would force the government’s hand anyway.

So, is this a prudent fiscal reform or a reckless gamble? In my view, it’s a bit of both. The tax breaks have distorted the market for too long, and their removal is overdue. But the timing is risky. The Australian housing market is a house of cards, and anyone who has been in finance long enough knows you don’t test the wind when the roof is already leaking.

Ultimately, this is a test of market efficiency. If prices fall gently, the economy can absorb the shock. If they collapse, we’ll see a rerun of the 1990s recession. My advice to investors: hedge your bets. The days of easy money in Australian property are numbered. The bottom line is that Canberra is finally acknowledging reality, but the market may have already priced in the correction.