Most urban areas in Australia are facing the prospect of increasing scarcity of water. Further pressure arises from evidence that existing levels of water use in many catchments are environmentally unsustainable. One option, feasible for some but not all Australian cities is the diversion to urban areas of water currently used for irrigated agriculture. Such diversions are currently constrained by a range of government policies. However, plans for the creation of a national water market raise the possibility that water rights may be purchased from irrigators and used to increase the supply of water for residential use. A number of policy concerns, notably relating to stranded assets and environmental externalities must be addressed in the consideration of such purchases.