An increase in home building activity is most likely the best way to rein in rapid rise in house prices, the Reserve Bank says.
In 2013/14 house prices grew more than 10 per cent nationally and 15 per cent in Sydney, driven by a big rise in investor activity, mostly in existing homes.
RBA assistant governor for financial systems, Malcolm Edey on Thursday told a parliamentary committee inquiry into affordable housing that an emphasis on increasing the supply of housing was needed to slow price increases.
"We can't improve housing affordability simply by adding to demand," Dr Edey said in Canberra.
"Targeted assistance can certainly help particular groups such as first-home buyers, but without a supply-side response, any generalised increase in demand will just be capitalised into prices."
Dr Edey said that investor loan approvals had increased by about 90 per cent over the past two years.
"It is against this background that the Bank said in its financial stability review last week that the composition of housing and mortgage market activity is becoming unbalanced," he said.
Dr Edey said housing affordability had fluctuated between around 20 and 30 per cent of disposable incomes in the past three decades.
"It has been rising recently and is now at the upper end of its recent range," he said.
Last week, RBA governor Glenn Stevens raised the possibility of changing regulations to curb risky lending to property investors.
The central bank is concerned that soaring house prices and rapidly growing investor activity could pose a risk to banking stability and to the economy.
"I want to emphasise that the banks in Australia are resilient, and mortgage lending in this country has historically been relatively safe," Dr Edey said.
"APRA (Australian Prudential Regulation Authority) has, however, noted a trend to riskier lending practices, and over the past couple of years has been seeking to temper these through its supervisory activities.
"Since this activity can amplify the property price cycle and increase risks to households."
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