While recent price rises have led to fears of an Australian housing bubble, the Reserve Bank simply sees them as the standard response to lower interest rates, writes Greg Jericho.

In 2013, the big economic and finance story was housing prices. It was a year where you could barely open a newspaper without reading about a record auction price in Sydney or about some parents who had bought a million dollar terrace house to give their son or daughter a helping start to adulthood.

The release yesterday of the ABS's latest index of residential housing prices, which saw prices throughout Australia grow by 9.3 per cent and by 13.8 per cent in Sydney, suggests the issue will remain big during 2014. The Reserve Bank however remains relatively nonplussed by the situation, and certainly not worried.

You can understand why people get worried about housing prices. First there are those who want to buy a home who see the prices going up and think to themselves that it might be best to put that dream of owning a home on the list along with items such as a world without computers, The Beatles touring Australia and anything else that fits under the heading of "things Baby Boomers experience that I won't".

Then there are those who do own a home who worry about whether prices will fall and thus reduce their "wealth" - or at least their perception of such wealth.

Finally the collapse of housing prices brings with it a collapse of building investment, the loss of jobs in the construction industry, and the inevitable recession which accompanies it through people who have borrowed money on the basis of the value of their home finding they now have a mortgage worth more than their property.

Looking at what happened in the USA in 2007-08 gives us an indicator of why people spend such time worrying about housing bubbles bursting:

From March 2007 to March 2009, the USA housing market fell around 30 per cent. Since then it has recovered slightly to the point where housing prices on average across that country are around where they were in the middle of 2004.

As a result, housing affordability in the USA is now at a level not seen for a generation. The problem of course is that the economic conditions which produced the lower house prices also produced an unemployment rate also not seen in a generation.

The Reserve Bank, as you would expect, has been alert to these fears, and devoted a separate section in its most recent Statement of Monetary Policy to the issue. And the upshot is the RBA wants you to know it is not worried.

For its part it feels the current increase in prices of the past year are essentially just the standard response to the declining interest rates over the past two years.

It notes that "following earlier reductions in interest rates, housing prices have been rising quite strongly, though growth has been well below the rates seen in the early 2000s". And it believes that "the rise in housing prices over the past year or so is broadly consistent with the historical relationship between interest rates and housing prices".

The RBA views this effectively as the aim of its monetary policy. Lower interest rates lead to reduced cost of housing which leads to investors being more attracted by "riskier, higher-yielding assets" which leads to "stronger demand for residential property" and thus higher prices.

If this only meant higher house prices then the economic gain would largely be an illusion - just a house being worth more than it was last year, but no economic benefit other than the ability for a person to borrow more money against that higher value.

The RBA however notes that higher prices generally boost dwelling construction, and this has certainly occurred in the past 12 months:

And for those who fear all this activity will lead to a bubble being burst due to people being over leveraged, the RBA would draw your attention to the fact that the level of debt among households has stabilised since 2005:

The RBA is keeping an eye on this level as it noted that "a substantial increase in leverage... could raise longer-run concerns from the perspective of macroeconomic and financial stability".

For the moment, however, the RBA is satisfied things are on track. It stated that "based on the outlook for inflation and activity as it currently stands, the Board's view is that a period of stability in the policy rate is likely". Thus it feels neither inflation nor housing prices specifically are at a point that needs dampening.

It might be the case that the market is already dampening itself. Yesterday the ABS also released the December housing finance figures. It showed that the overall value of housing finance commitments in December grew by only 0.2 per cent (seasonally adjusted) and the number of finance commitments actually fell 1.9 per cent, suggesting the ever so slight sign of a plateau:

And while housing prices have increased, the average mortgage size has been almost flat since 2010 - a very unique situation, given since 1975 the value of the average Australian mortgage has risen by 26 per cent every three years:

The RBA will keep a watch on these figures, but for now it believes that the calls of the bubble bursting are a bit premature - not least because they don't see any bubble at all.

Greg Jericho writes weekly for The Drum. He tweets at @GrogsGamut. View his full profile here.