Treasurer Scott Morrison’s announcement on Wednesday that the government is forcing seven foreign residential property investors to sell their dwellings, leaves several unanswered questions.

Given that more than 500 cases of shonky activity are currently being investigated, how many more such divestments will there be? And what will that do to house prices?

In the past two years there has been a rising chorus of concern about foreign investors buying into Australia illegally and pushing prices out of reach for local homebuyers.

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But for all the noise in Canberra, and in the media, estimates of how big a problem this is are still sketchy.

Could the housing bubble finally burst? Photo: Shutterstock

The most reliable data so far, compiled for the National Australia Bank Quarterly Residential Property Survey, suggests that in the June quarter, 8.6 per cent of established house sales were to foreign buyers, and 11.4 per cent of established apartment sales.

Those are the figures the government is worried about.

There is no problem with foreign buyers purchasing new homes, or even temporary residents buying established homes while they are here for legitimate study or work periods – though they must sell up when their temporary residency visa expires.

But buying established homes without any kind of residency is just plain illegal. So if the NAB figures are correct, Mr Morrison is going to have to force a lot more owners to sell up.

Further evidence of the scale of this problem was uncovered by MacroBusiness economist Leith van Onselen, who notes that since September 2014 there has been a highly unusual de-coupling of two data sets that normally move in unison.

House price growth usually ebbs and flows at the same time as the number of housing finance commitments. That makes sense, as when more loans are written, there’s more money washing about to bid up prices.

However since late 2014, those two have been heading in different directions in our two ‘bubble cities’, Melbourne and Sydney.

It’s good news for young buyers if the housing boom collapses. Photo: Getty

That is, the rate at which mortgages are being written has slowed considerably, while the rate at which house prices have grown has sky-rocketed.

The logical explanation for that divergence is that cash buyers have come into the market in droves.

That may include nervous retirees who have access to large superannuation lump sums – they may be buying apartments or houses in preference to shares or other asset classes.

More likely, given the NAB figures above, is that large volumes of cash flowed into the country and propped up the bubbles that otherwise would have started to deflate.

That is a headache for Mr Morrison. While it is laudable that he’s trying to clamp down on illegal activity, he may end up scaring off enough overseas investors to cause a price slump in those two cities at least.

Much of the stellar house price appreciation in Sydney and Melbourne occurred before the Australian Prudential Regulatory Authority introduced two reforms designed to chase a good proportion of property speculators out of the market.

First was the 10 per cent growth ‘speed limit’ on investor loans, which banks are trying to meet by raising investor interest rates.

The second is the tighter capital reserve requirements APRA has imposed. The capital that banks are raising must be serviced, so the increased cost of lending has also been passed onto investors via interest rate hikes.

None of that affects illegal investors, however. They are not borrowing – they’re paying cash.

So the bubble cities appear to have been pumped up by the combined forces of slack lending practices (that is, before the APRA reforms), and a flood of foreign money.

APRA Chairman Wayne Byres is cracking down on slack lending practices. Photo: AAP

APRA is stamping out the slack lending practices, and the Treasurer now says he’ll stamp out illegal money flows from abroad.

If he succeeds, that means the two forces that caused the end-of-boom price surge will collapse, as will prices – great news for young buyers, and bad news for those who will have to watch paper profits go up in smoke.

And there’s every reason to think he will succeed. The owners of the seven forced divestments announced on Tuesday dobbed themselves in, as part of a reduced penalty amnesty that expires on 30 November.

After that, stiff penalties will be enforced – $135,000 fines, and up to three years in prison. Existing legislation also allows the government to confiscate the profit made on the property, or 25 per cent of the purchase price – whichever is larger.

That means that for every successful prosecution, the government will get more money. The newly assembled 50-strong team working on this at the ATO could therefore be funded to expand much further.

And Mr Morrison is asking the community to help this process by ‘dobbing in’ illegal buyers (see the hotline details below), agents or other businesses helping to arrange dodgy deals – the latter will also face harsh penalties if legislation currently before parliament is passed.

A word of warning, however. Bidders at an auction who appear ‘foreign’ may be Australian residents or citizens, and bidders who look local may be bidding on behalf of overseas buyers. Spotting the difference isn’t easy, and should be handled with care.

Even the ATO, expert at tracking down illegal practices, will struggle to pick apart complex transactions involving trusts and companies for which the ‘beneficial owner’ can become blurred.

The uncertainty around the vexed issue is starting to be cleared up. Where that will send house prices will be the big question for many in the month ahead.

Want to dob in illegal activity? You can call the ATO hotline on 1800 050 377, email [email protected] or register complaints anonymously via forms.

Read more columns by Rob Burgess here