Glenn Stevens, Reserve Bank governor, said in a major speech in Sydney that property prices need to be kept under control and that means more supply.
'A very real challenge in the near term is how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices,' he said.
'Given the circumstances the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs, this ought to be the time when we can add to the dwelling stock without a major run-up in prices,' he added.
'If we fail to do that, if all we end up with is higher prices and not many more dwellings, then it will be very disappointing, indeed quite disturbing,' Stevens warned.
The real estate market in Australia has held up well during the current global economic downturn, which economists have attributed to the government's increased first home owners grant. The scheme has also been extended until the end of September.
Stevens agreed with others that the decline in interest rates together with the additional grants for first-home buyers has resulted in a significant pick-up in demand for property. He explained that the value of loan approvals has risen by about a third since the low point in the middle of 2008.
But it is the coming months that will be crucial for the Australian market. 'In contrast to so many other countries house prices are tending, if anything, to rise, and arrears rates on the bulk of mortgages remain very low by historical and international standards,' said Stevens.
He added that the global outlook had improved and emphasised the role of business and consumer sentiment and confidence in helping to lift economic conditions.
