AAP, with a staff reporter
The Reserve Bank of Australia says concerns record low interest rates will spark an unsustainable house price bubble are "alarmist".
RBA assistant governor Malcolm Edey told a Sydney conference that although house price growth was "higher than average", it was not getting out of control.
Dr Edey said household incomes had been keeping up with rises in home prices over the past 10 years, with inevitable peaks and troughs in the ratio over that period.
"We shouldn't be rushing to reach for the bubble terminology every time the rate of increase in house prices is higher than average because by definition that is 50 per cent of the time," he told the Financial Services Institute of Australasia (Finsia) conference in Sydney.
"You're just going to be unrealistically alarmist in making that call every time that happens.
"This is an area to watch but we do need to keep it in perspective."
Earlier this week, the International Monetary Fund called for tougher global lending rules to stop banks fuelling price bubbles.
Its report raised concerns that record low interest rates in Australia are generating the beginnings of an unsustainable property price boom, with two senior economists calling for regulators to act after the RBA September meeting minutes yesterday said it was important for banks to maintain prudential lending standards in a low interest rate environment.
Dr Edey said low interest rates were benefiting the housing sector at the moment.
"One of the expected effects of low interest rates is that it stimulates demand, spending and borrowing – that's how monetary policy works," he said.
"We're seeing that influence working at the moment in the housing sector."
Australian Prudential Regulation Authority chairman John Laker said the low interest rate environment was a positive for Australia, but warned there were risks that would grow over time if interest rates stayed low for a long time.
One problem was borrowers not being able to make their repayments once interest rates did eventually go up.
"There is a broader risk in that if institutions lower their lending standards either to protect their market share or acquire more market share," Mr Laker said.
"It's been something that we have been, in the last few years, talking to deposit-taking institutions about very, very intensely."
One of the causes of the global financial crisis was financial institutions in the US and Europe making risky loans, which were exposed when house prices collapsed.
Mr Laker said the Australian banking system was more sound than it was five or six years ago.
"We know that because we managed to negotiate the financial crisis without the fallout for our financial systems," he said.
"The banking sector is holding more capital, it's holding higher quality capital, it is holding more liquid assets."