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Bubbly, anyone? The Sydney property debate

Brendon Thorne | Bloomberg | Getty Images

Sydney home prices may have surged, but even Australia's top policy makers can't agree on whether the market is a bubble.

"A lot of people have trouble identifying what a bubble is," Peter Churchouse, publisher of the Asia Hard Assets Report, said, noting that even as late as 2007 then - U.S. Federal Reserve chief Ben Bernanke commented that he didn't see a housing bubble in the U.S.

It's a debate that came in to focus in Australia this week. In a quick point-counterpoint, Australian Treasurer Joe Hockey denied Tuesday the country faced a property bubble, adding that "if housing were unaffordable in Sydney, no one would be buying it " and that first home buyers should get "a good job that pays good money" if they wanted to enter the housing market.

But on Wednesday, Reserve Bank of Australia (RBA) Governor Glenn Stevens said Sydney home prices were "crazy" and "acutely concerning."

Read More Aussie property's bubbly days are numbered: Goldman

"The issue is politicians, in general, like the idea of Australian property prices going up. There's the wealth effect attached to it," Tony Farnham, an economist at Patersons, said. "From the regulatory side of things … it's not just RBA Governor Stevens who's said to see frothy components."

Earlier this month, the country's Treasury Secretary John Fraser told a Senate hearing that Sydney housing was "unequivocally" in bubble territory.

That prices in the capital of New South Wales have surged isn't in dispute. The asking price for all housing units in Sydney is up 11-12 percent over the past year and 25-29 percent over the past three years, according to data from SQM Research. The median asking price for a house in Sydney is around 1.1 million Australian dollars ($850,000), the data show.

Sydney housing's median price-to-income multiple of 9.8 ranks it well above the 5.1 times that would mark the "severely unaffordable" level, according to Demographia's housing affordability survey of 2014 data.

Of course, there is a traditional way to definitively call a property bubble: when it pops. Regulators aren't likely to want to wait for that moment, but a fix likely won't be easy.

"The problem they've got in this cycle is that we've had extremely low interest rates all the way around, but it hasn't boosted economic growth and inflation the way it has in previous cycles, [but] asset markets are strong and bubbly," Churchouse said. "You've got a conflict here where they want to be able to slow down the asset bubbles, but raising the interest rates will derail proposals to get growth on track."

Read More Foreigners add to Australia housing bubble fears

Low interest rates are likely behind continued growth in mortgages in Australia. In the year to April, housing finance approvals were up 6.2 percent on-year, with April's 24.3 percent on-year surge in the value of approvals of loans to investors "concerning," Goldman Sachs said in a note earlier this week.

For his part, Churchouse said he was "rather surprised" by Hockey's comments denying a property price issue in Sydney. "It smacks very much of U.S. 2007 kind of talk," he said, noting he expects more macroprudential measures to tighten up lending to the sector.

To be sure, there is one reason that Sydney's housing market, however expensive, might not really be a bubble.

"There's a massive amount of pent-up demand," Farnham noted, citing family formation, immigration and people moving to "where the jobs are." But the demand growth has come as not enough housing has been built, he said.

"In the Sydney context, it's surrounded by national parks. It's becoming more difficult to build. Then there's a planning process that's tricky. It takes a long time to get … planning approval," he said. "If you did get increases of supply into our market, all other things being equal, prices should come off the boil."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1