Recommendations to tighten rules around foreign investment in Australian housing have been labelled "absurd", with a prominent economist saying they could damage the economy by weakening the housing and construction sectors.

Stephen Koukoulas, managing director at Market Economics and a former economic adviser to prime minister Julia Gillard, said a coalition-led parliamentary inquiry into foreign investment in Australian property was proposing “an awful lot of red tape” for a non-existent problem.

One of 12 recommendations from the inquiry, tabled in parliament on Thursday, was that penalties be imposed on third parties who help offshore buyers to breach foreign investment rules.

It also wants an administration fee imposed on overseas buyers, an improvement in the leadership and systems at the Foreign Investment Review Board, and a national register that tracks overseas buyers.

Mr Koukoulas said penalising third parties was “absolutely absurd”.

“Wanting to impose heavy fines and civil penalties for people involved – it’s not like you’re trafficking heroin, it’s just someone trying to buy a house and the house is still here, they can’t take it with them,” Mr Koukoulas said.

“There are much more important issues to worry about in the housing market than a few foreigners buying a tiny proportion of our property market – I think it’s just a made up problem to be seen to be doing something.

“At a time when there’s already evidence that house prices are decelerating… this is coming at exactly the wrong time for the housing market.”

Mr Koukoulas said the recommendations could also dampen construction activity, given foreign investment plays a role in supporting multi-apartment building.

“You’ve got to be extremely careful because the unintended consequences of doing these sorts of things means that new construction could be weaker,” he said.

“To hit the housing market when the rest of the economy is pretty sluggish is arguably not the best thing to do.”

HSBC chief economist Paul Bloxham said the recommendations were sensible and measured, helping to better enforce current rules around foreign investment, which was helping to boost Australia’s housing supply.

“My sense is that what’s been delivered is not particularly heavy-handed,” he said.

CommSec chief economist Craig James said recommendations to collect more data on foreign investment were a positive step, helping to paint a clearer picture about the true levels of foreign buying in the property market.

“A more transparent system of recording property transactions is in everyone’s interests, because if there’s a shortage of investment coming through, the government can then provide greater encouragement,” Mr James said.

“There’s a general perception in the community that foreign investment is driving up prices and making affordability worse, so getting more information on that would reduce any of those negative concerns and that would be positive, not just for local buyers but for foreign buyers.”

By Belinda Merhab