Intense media focus on housing affordability has primarily focused on the story of the individual; the young person who can't afford a house. But in all of our focus on the individual, we are failing to recognise the greater problem – that when house prices do fall, and they will, they risk taking our banking system and the wider economy with them. We need to induce a "soft decline" before it is too late.

The myth that house prices must continue to rise, and that housing is somehow different to any other asset class, is a dangerous one. Like any other asset class, housing is subject to changes in demand, speculation, and increases and decreases in price. This is obvious when one looks to the house price reductions in the US and Europe during the global financial crisis, and house price declines in Australia in the early and late 1980s.

Are we in a bubble now? Pricing bubbles exist where price growth outstrips demand growth. Population growth has increased by less than 2 per cent per annum over the last five years, while housing prices have increased at an average of 7.5 per cet per annum. To back this up, in March ASIC made the unusually direct statement that the Sydney housing market is in a "bubble" scenario where asset prices are overvalued.

Systemic risk, or contagion risk, is the risk that difficulties in one asset class or institution spill over into others. The value of outstanding housing loans financed by Australian authorised deposit-taking institutions is about $1.6 trillion, roughly equal to our entire annual gross domestic product. The sheer size of the housing market means that declines pose a systemic risk to our financial system and to our economy. There is a very real risk that a sudden decline in house prices will cause defaults among overleveraged homeowners, leading to a vicious cycle of price reductions, lower spending and job losses.