Treasury secretary John Fraser has warned that Sydney is "unequivocally" in a housing bubble, as the latest data shows annual growth rates picking up again.

Mr Fraser raised concerns that having interest rates at historically low levels was encouraging people to over-invest in real estate.

He told a Senate hearing on Monday morning there was no doubt in his mind there was a housing price bubble in some parts of the country.

"When you look at the housing price bubble evidence, it's unequivocally the case in Sydney. Unequivocally," he said.

"Frankly, whatever the data says, just casual observation can tell you it's the case."

The life cycle of a housing bubble Low interest rates, loosening lending standards bring borrowers into the market

Low interest rates, loosening lending standards bring borrowers into the market Demand for property increases in the face of limited supply

Demand for property increases in the face of limited supply Supply takes a relatively long time to replenish and increase

Supply takes a relatively long time to replenish and increase Speculators enter the market believing profits can be made through short-term buying and selling

Speculators enter the market believing profits can be made through short-term buying and selling Demand increases further

Demand increases further Interest rates rise, lending standards tighten

Interest rates rise, lending standards tighten Demand decreases, or stagnates; supply increases

Demand decreases, or stagnates; supply increases Prices drop sharply

Prices drop sharply The bubble bursts (Source: Investopedia)

Mr Fraser said the same applied to some parts of Melbourne, and did not totally rule out potential problems in other parts of Australia.

"Certainly I think that's the case in the higher priced areas of Melbourne, and I base that on my own observation as well as the data," he continued.

"For the rest of Australia, the evidence for a bubble is less compelling."

Asked in Question Time whether he agreed with the Treasury Secretary, Prime Minister Tony Abbott emphasised efforts to make housing more available and affordable, but said he hoped prices would increase "modestly".

"As someone who, along with the bank, owns the house in Sydney, I do hope that our housing prices are increasing," he told Parliament.

"I want housing to be affordable but nevertheless, I also want house prices to be modestly increasing."

Also appearing at a Senate hearing, Reserve Bank assistant governor Malcolm Edey would not go as far as agreeing there was a bubble, but did acknowledge the market was "overheated".

Dr Edey said overinvestment in housing posed economic risks for households and the country.

'It's a risky situation' as market overheats

"A lot of people do think it's a bubble, serious people think that, and we agree that this is a situation where the market is strong, it's overheated, it's a risky situation," he said.

Sorry, this audio has expired Treasury secretary John Fraser warns on property bubble

The latest data shows that home prices went backwards last month, but that is likely down to seasonal factors, with price increases actually picking up pace on an annual basis.

The widely-watched CoreLogic RP Data home value index for capital cities fell 0.9 per cent last month, but was up 9 per cent over the year to May.

That is much stronger than the 7.9 per cent rise reported over the year to April.

The apparent divergence between the monthly and annual figures is due to May typically being a seasonally weak month for property sales, as homes that have failed to sell earlier in the autumn selling season are often sold off at a discount.

"I think this month-on-month weakness we've seen in May will be short-lived," predicted CoreLogic RP Data's research director Tim Lawless.

"We did see another weak performance in May last year where values did drop by just over 1 per cent, so we are seeing those pull-down effects moving out of that 12-month comparison."

Sydney and Melbourne continue to lead price rises across the nation, with annual increases of 15 and 9 per cent respectively, although both cities saw prices decline last month.

Despite that monthly decline, Mr Lawless said that Sydney and Melbourne had now moved back onto an uptrend in the rate of price growth.

"This is a reversal in the moderation of the growth trend we're seeing since about April of last year all the way through to February this year, but it looks like the rate cut we saw in February has really caused a rebound in the rate of value growth in Sydney and in Melbourne.

However, that rate-induced bounce is not evident elsewhere.

Brisbane, Adelaide and Canberra posted modest annual price growth roughly in line with income increases, while Perth showed a modest rise and Hobart and Darwin lost ground over the past year.

Investor lending crackdown should slow growth: Lawless

Mr Lawless said his expectation was that price growth would moderate in Australia's two largest cities as the banking regulator APRA's pressure on lenders to scale back loans to investors took effect.

"Tightening of lending to investors from the banking sector will have some effect on the marketplace," he said.

"We've got to remember investors are just over 50 per cent of all new mortgage originations now, which is an historic high, they're about 60 per cent in Sydney."

Mr Lawless said he did not think any slowdown would stop price growth in Sydney and Melbourne altogether.

However, he warned that prices for apartments may stagnate as a surge of newly built apartments comes on to the market just as investor demand is easing.

"The higher supply levels in the apartment space will probably be a bit of a drag on the capital gain for apartments, but detached housing where supply levels are nowhere near as high ... will probably continue to fuel growth in the detached housing space," he added.