The Reserve Bank of Australia governor has issued a sobering warning about the state of Australia's housing markets.
At an RBA board dinner Philip Lowe said home loans are continuing to outstrip household income growth.
He partly blamed the banks, saying they are too liberal in their lending practices.
"Too many loans are still being made where the borrower has the skinniest of income buffers after interest payments. In some cases lenders are assuming that people can live more frugally than in practice they can."
Mr Lowe welcomed new measures by regulators to restrict investor lending.
The Australian Securities and Investment Commission, or ASIC, says it will step up its monitoring of lending practices.
And the Australian Prudential Regulation Authority, APRA, plans to limit interest only loans to 30 per cent.
Prime Minister Malcolm Turnbull has welcomed the restraints but says they're only a minor part of the solution.
He says the real issue is the lack of housing.
"For too long supply of new dwellings had been constrained so demand had overtaken supply and you got, as a consequence, a big increase in prices."
Mr Lowe had made a similar point in his speech, saying the underlying driver of the housing market is the balance between supply and demand.
In the last year, Australia's housing market has skyrocketed, mostly in the major cities.
According to property consultant Core Logic, Sydney's prices surged almost 20 per cent compared with this time last year.
And it's a similar story in Melbourne, where growth in the last 12 months is almost 16 per cent.
The government says it will make housing affordability a key component of the upcoming May budget.
But Treasurer Scott Morrison says borrowers should use their common sense when deciding whether to take a home loan.
"Just because a bank says you can borrow it doesn't mean you should. Sometimes when people look at what the banks say they will loan to them, they seem to think that is somehow a green light and they've been given assurance they will be able to repay this. Individuals always have to make the ultimate choice about these things."
Since last year's federal election, Labor's policy has been to limit negative gearing and reduce the capital gains tax discount.
Labor's Treasury spokesman Chris Bowen says such tax concessions are a significant part of the problem.
"Supply is a very important part of the equation but while you've got these tax distortions and the most generous property tax concessions in the world, you're going to find investors taking up more and more of that supply and that's been borne out in every release of data that we've seen."
But Scott Morrison warns against abolishing negative gearing, telling the ABC it would be too broad a measure.
"The idea that you should be focusing solely on these broad tax policies that will impact every market and will impact it differently, you've got to be very careful about this. Labor wants a chainsaw: we think you should use a scalpel."
But the government has not ruled out changes to the capital gains tax.
However it has refused to rule out allowing first home buyers to access their superannuation before retirement to pay for a deposit.
But independent Senator Jacqui Lambie has told Channel Nine she believes that could be a solution to get younger buyers into the market.
"I think it's certainly worth putting on the table and discussing and see whether we give our young kids the opportunity to start investing in their own home."
