Australia's top economic bureaucrat says he is not concerned about any housing bubbles in Sydney or Melbourne bursting and causing severe financial instability because there has been a healthy increase in supply in recent months.
Treasury secretary John Fraser has told senators in Canberra he is not concerned about possible sharp falls in prices, despite warning of an "unequivocal" housing bubble in Sydney and parts of Melbourne just four months ago.
"We'll see what happens with housing," he said on Wednesday.
"There's been a supply response, which is good. So there's more houses, you know, the pipeline of housing construction [has increased]."
Debate erupted last week when Macquarie Bank's economists sent a note to clients warning them that house prices could decline by 7.5 per cent from March next year as a huge increase in the supply of apartments started to overwhelm demand.
Other leading investment banks then tipped Australia's housing market, which has been a driver of economic activity as mining has slowed, was close to peaking as household budgets are too stretched and supply is beginning to outstrip demand.
Macquarie forecast the nation was looking at a 7.5 per cent reduction from "peak to trough".
And Credit Suisse went a step further, warning property investment in Australia was "riskier than the equity market", particularly in NSW.
But Mr Fraser said on Wednesday he was not worried about risks to Australia's financial stability from property price falls.
"I'm not particularly worried. I think the measures that have been taken by the Australian Prudential Regulation Authority, and the banks' own measures, have been sensible," he said in Senate estimates.
He acknowledged recent Bureau of Statistics figures showed Sydney house prices grew by 8.9 per cent in the June quarter, the strongest quarterly price rise since 2003.
He didn't think such price rises would be sustained for long.
"It's for everybody to make up their own mind," Mr Fraser said.
"Eight point nine per cent [in a quarter], let's say ... that's a big annual rate of increase. It means Sydney house prices are going to double within three years if that were sustained, [but] I don't think it's being sustained."
Treasury has been keeping an eye on housing affordability, he said, and has been participating in a cross-departmental working group since the beginning of this year, with the Department of Social Security acting as lead agency.
"The working group has had a number of cross-departmental and cross-ministerial meetings here in Canberra on the question of housing," Mr Fraser said.
"It's a big issue us. For me personally, for the charities I work with, it's distressing to see young people not being able to have the good ride I had, and others of my generation had."
with Mark Mulligan