Treasury secretary John Fraser says Sydney is "unequivocally" in a house price bubble, as are high-end parts of Melbourne, adding to the risk that people are over-investing in property.
In one of the strongest official warnings about
the dangers of surging property prices, Mr Fraser said recent growth in popularity of renovation shows is a sign that "something is amiss".
"When you look at the housing price bubble evidence, it's unequivocally the case in Sydney," Mr Fraser told a Senate estimates committee hearing on Monday.
He said it was also "certainly the case in higher priced areas in Melbourne" while elsewhere in Australia "the evidence is less compelling".
"I base that on my observations as well as the data," Mr Fraser said.
Lamenting the "highly unfortunate" impact of rising prices on younger people trying to enter the market, Mr Fraser cautioned that investors might be taking on too much risk.
"It does worry me that the very low historical interest rates are encouraging people to perhaps over-invest in housing.
"I"m not just [talking] about buying housing, but i'm talking about investing in housing."
"You just have to see these renovation shows … to realise something is amiss."
Mr Fraser, who responding to questions from Greens senator Peter Whish-Wilson, said the house price problem was particularly confined to certain markets - such as Sydney but not the rest of NSW.
"It does seem a little bit like a feeding frenzy, but when you get out of those suburbs into the outer suburbs it's less the case."
He mentioned a taxi driver in Sydney last on Sunday who had just turned over his property in the city's western suburbs and asked him whether he should buy three or four investment properties.
Mr Fraser said he did not provide the taxi driver with any advice, but noted to the committee the old adage that "when bellboys are buying equities, it's time to get out".
Mr Fraser said he was more worried about the social impact of high prices in parts of Sydney and Melbourne for younger people and those on low incomes.
Mr Fraser said he had observed while living in London, where he spent five years on the board of a girl's school, that "attracting teachers became harder and harder simply because they couldn't afford to live in London.
Mr Fraser indicated the housing issue was both caused by monetary policy and "a perception that this will be a never-ending increase in housing prices and we know that will not be the case".
APRA's role in monitoring mortgage lending was the focus of a report tabled in federal Parliament by the House Economics Committee on Monday.
The chairman of that committee, John Alexander, said the financial sector was showing overall stability but there was evidence of emerging risks in the housing market which must be carefully monitored by APRA.
"An increased scrutiny of mortgage portfolios is an appropriate response to this issue and we will be requesting updates from APRA in this regard at future hearings," he said.
The committee is responsible for reviewing the annual reports of govenrment agencies. APRA officials appeared before the committee in March.
The report notes that APRA has written to all authorised deposit-taking insitutions (mainly banks, credit unions and building societies) to inform them of strenghtened residential mortgage lending standards. APRA is increasing scrutiny in areas such as investor lending and serviceability assessments for new borrowers.
"The committee notes APRA's response to the increased risk in the domestic loan portfolio and is eager to follow up on APRA's approach to the supervision of property lending at subsequent hearings," the report said.
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