Noble Prize economics winner says Sydney and Melbourne in property bubble

The Nobel Prize for Economics 2002 winner, Professor Vernon Smith says both Sydney and Melbourne are in a property bubble, but queries whether it will burst as badly as the US bubble.

Debt will be the key to the outcome, with Australia's flexible mortgages helping ameliorate the danger, Professor Smith said.

"It is amazing how people get carried away in the bubble," he says. "Then all of a sudden it's over and they are petrified."

He will explain more tonight in his address at the Macquarie Graduate School of Management dinner on global property prices and the Australian property market.

"You have a pretty good bubble in Sydney and Melbourne," he told Robert Harley at the Australian Financial Review on his research so far on the recent price spurt.

"It is hard to believe it is very sustainable."

He says housing bubbles are commonplace in history and most of the time they're not devastating.

He noted in the US in the recent Great Recession, similar to the Depression "it was what I like to call a balance sheet recession with property values falling against fixed long term debt.

"Total equity in all US homes peaked in 2006 at something over $US13 trillion, then hit $5.5 trillion," he noted adding in the 1930s Depression, when housing equity declined by 33 per cent, it took 13 years to recover.

"We came out of the Depression with right lessons … but the rules got eroded." 

Professor Smith acknowledged the tight supply, the rental market resilience and mortgages on only 5.3 million of Australia's 9.5 million homes.