"I hope that's the case, because as I've said a number of times in the past year, the risk of developments in the housing market derailing the economy has increased a little bit, the risk in the housing sector is higher than it was a few years back." A moderate effect Dr Lowe, who is likely to eventually replace Glenn Stevens as RBA governor, said policies pursued by the Australian Prudential Regulation Authority finally appear to be having "a moderate effect" on property prices. "You've seen a tightening of lending standards through the banking sector, a re-pricing of loans, [and] banks requiring larger deposits," he said. "I think those things are gradually working their way through the system ... [and] the supply response does seem to be kicking in and if that's what's happening, it's good news."

He also warned investors that property prices – and debt levels – cannot continue rising much faster than incomes. Hard landing risk But he refused to back a report by Macquarie Bank, written on Monday, that warned of a 7.5 per cent fall in Australian house prices next year. "I don't want to endorse that particular number," Dr Lowe said. "House prices in Sydney have risen by more than 20 per cent in the past year and prices are still rising."

Analysts from Credit Suisse and Bank of America Merrill Lynch have warned in recent days that the level of household debt in Australia has become so high it has increased the risk of a "hard landing." Bank of America Merrill Lynch economist Alex Joiner says the dwelling price to income ratio is at "never before observed" levels of five and a half times, and the household debt to gross domestic product ratio is at a "record high" 133.6 per cent. If the RBA lifted interest rates, and if the housing market experienced a downturn, that type of debt would seriously impact consumer spending and property investment, he said. "It is difficult not to envisage a more hard landing scenario in the property market," Mr Joiner wrote in a client note. "This would clearly have a greater impact channelled through households and the residential construction cycle."