THE Reserve Bank has warned lenders and borrowers to be prudent while giving an assurance that Australia does not have a speculative housing bubble on its hands.
Fears of a property bubble emerged after the Australian Bureau of Statistics house price index rose 20 per cent in the year to March.
But RBA head of financial stability Luci Ellis said Australian house prices have recovered their small decline from 2008 to post increases of between about 12 to 15 per cent over the past year in capital cities, depending on the measure.
Ms Ellis said recent data suggested Australia does "not have a credit-fuelled speculative boom on our hands".
"It would not be desirable for the current situation to turn into one," she said in a speech.
"It will therefore be important for lenders to remain prudent in their standards.
"It will be equally important for prospective borrowers to have realistic expectations, and not to rely on a hoped-for capital gain in order to service their debts."
She told a residential property conference housing prices have been under upward pressure in Australia, with most short-term drivers coming from the demand side following the increased first home-buyers grant, low interest rates and lower than expected unemployment.
"The nature of the demand shock Australia faces means that it would be helpful if more of that demand could be accommodated with extra homes for occupation, instead of by higher prices," she said.
"Some of that pick-up in construction does seem to be happening."
She said the supply of housing was always going to be quite "sluggish".
"But whatever the causes, the ability to add to supply is falling short of this higher rate of population growth, despite some pick-up recently," she said.
"Naturally that is putting upward pressure on housing prices."
Ms Ellis said it would be "desirable" for the supply of new dwellings to become more flexible than it had been to date because extra people need somewhere to live, and both house prices and rents could rise.
The more that housing prices rise, the more some people might feel they must stretch their finances to buy a home, she said.
Another concern was that if too much of the response to faster population growth comes as faster growth in housing prices, this could be "built into people's expectations".
"If price expectations become over-optimistic and encourage too much investor demand, the result could be disappointment, or worse," she said.
She also said fewer households had bought their homes without debt.
Across the mortgage market, lending standards were now a little tighter than they were a few years ago and the fraction of low documentation loans was now lower than it was two years ago for both owner occupiers and investors, she said.
As well, only a minority of recent home loan borrowers started with a loan to value ratio above 90 per cent, she said.
Ms Ellis also revealed the RBA has been carefully watching lending standards in the important first-home buyer market segment.
"First-home buyers have long faced greater risk than more established home owners who have more equity in their home," she said.
"But as far as the data allow us to tell, recent new loans to first-home buyers look quite like those made to previous cohorts of first-home buyers."
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