Rising home prices are the biggest enemy for first home buyers, not rising interest rates, according to the head of the Reserve Bank.
At a parliamentary committee hearing, RBA governor Glenn Stevens was asked by a school student if first home buyers will get caught in a debt trap once interest rates start rising again.
Mr Stevens said the ability for first home buyers to get into the housing market is an important consideration for the RBA.
He added that banks test a borrower's ability to make repayments at higher interest rates when they issue a loan.
"The biggest enemy for first home buyers is rising house values," Mr Stevens said.
"It's an important social issue how your generation will afford to house itself if you want to live in a city where the supply side of the market is unduly constrained."
Mr Stevens said "more innovative and more flexible" use of land in major cities like Sydney was needed.
The RBA officials were asked by another student about what steps were being take to protect the next generation of home buyers.
Mr Stevens said having more dwellings will help push the prices down.
Deputy RBA governor Philip Lowe said investment in more public transport is also an important factor helping first home buyers.
"I think as a society one of the things we can do is invest more effectively in transportation to increase the supply of well located land and put downward pressure on land prices and make housing more affordable," Dr Lowe said.
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