Australia's central bank risks fueling unsustainable house price growth by its last rate cut, according to the chief economist at HSBC, Australia.
Paul Bloxham, who formerly headed up the Reserve Bank of Australia's department overseeing financial conditions, said Sydney house prices were particularly vulnerable to overheating - and thus more likely to crash whenever rates begin rising again.
The RBA last week cut its benchmark cash rate target to a record-low 2.25 per cent from 2.5 per cent, where it had sat for about year-and-a-half, to help stoke Australia's stalled economy.
The decision quickly flowed into lower mortgage lending rates, which is likely to encourage property speculation at a time when prices are already running hot in several major cities.
There are several pockets of the housing market where "bubbles could be forming," Mr Bloxham said in an interview. "The longer housing prices continue to increase faster than household incomes, the greater the chance a bubble could inflate."
Financial markets are expecting a further rate cut before the middle of the year. Mr Bloxham said such a move could be dangerous especially in Sydney, where house prices have jumped by more than 50 per cent since 2009.
"Growth in Sydney housing prices is currently running at an unsustainable pace," Mr Bloxham said.
Government data on Tuesday showed house prices in Sydney rose by 3.4 per cent in the fourth quarter from the third-almost double the national pace-and by more than 12 per cent from a year earlier.
In December, Australia's banking regulator announced new guidelines for monitoring lending to investors as part of measures to prevent the housing market from overheating while the economy remains fragile.
Mr Bloxham said the plan was an untested means of controlling house-price growth. "It is unusual in Australia for prudential policy and interest rate settings to be working in opposite directions," he said.