Reserve Bank governor Philip Lowe says falling house prices and a weaker property market, particularly in Sydney and Melbourne, are welcome developments.

Key points: RBA says the rise in house prices was not sustainable and a pull-back in prices is welcome

RBA says the rise in house prices was not sustainable and a pull-back in prices is welcome The economy is delivering "a pretty good set of numbers"

The economy is delivering "a pretty good set of numbers" He says the biggest risk is an overheating US economy leading to a rapid rise in interest rates hitting global markets

In his semiannual parliamentary testimony, Dr Lowe said while the trend worries some people, things needed to be kept in perspective.

"Not so long ago there was concern in the community about rapidly rising housing prices and debt and declining housing affordability," Dr Lowe told the House of Representatives standing committee on economics.

"These earlier trends were not sustainable and were posing a medium-term risk to our economy.

"So a pull-back is a welcome development and can put the market on a more sustainable footing.

"It is good news that this adjustment is taking place at a time when global growth is strong, the labour market is positive and interest rates are low."

Pretty good set of numbers

Dr Lowe said overall the Australian economy, with GDP growth above 3 per cent, inflation around 2 per cent and unemployment below 5.5 per cent, continued to move in the right direction.

"In the broad sweep of our economic history, these are a pretty good set of numbers.

"We would, of course, like them to be better — we are still short of full employment and we would like to be more confident that inflation will be sustained at a level consistent with the target.

"We had another reading on the Wage Price Index a couple of days ago, which showed a welcome uptick.

"Even so, the pick-up in wages growth is still expected to be fairly gradual. We still have some spare capacity in the labour market, including part-time workers who would like more hours."

While inflation remains stuck at, or below, the lower reaches of the RBA's 2-to-3 per cent target range, Dr Lowe said there was "good news" there too with falling utility and childcare costs.

"In the short term, though, we are expecting the headline rate of inflation to dip a little in the September quarter," he said.

"Collectively, these changes will help with cost-of-living pressures and free up income to spend on other things."

Global uncertainties

While sanguine on the local front, the RBA's greatest worries appear to be the global economy.

Dr Lowe said while the tariff measures announced so far were unlikely to derail things, it was possible they could.

"I can't think of a country that has made itself wealthier by raising barriers," he said.

"A bigger threat could well be the US economy overheating from the impacts of rising inflation and tax cuts, driving interest rates up rapidly.

"Financial markets remain relaxed about the implications of this for inflation.

"I am less relaxed, it is highly unusual to have such stimulatory fiscal policy when the economy is already operating at a very high level of capacity."

A rapid increase in interest rates could have "disruptive consequences in financial markets", Dr Lowe argued.

"Investors largely think inflation is going to stay low, unemployment will stay low and interest rates will stay low."

"Quite possibly a return to normal risk premiums would see long-term bond rates rise and asset prices would have to be restructured.

"If long-term bond yields rose, there would a lot of asset repricing and markets are not prepared for that."