Malcolm Edey, the RBA assistant governor for financial systems, has told a parliamentary committee there needs to be an emphasis on increasing the supply of housing.

His comments come as the inquiry seeks to address problems of housing affordability throughout the nation. In 2013/14 house prices ballooned by a staggering 10 per cent nationally. Most of this has been blamed on investors rather than those just entering the market.

Malcolm Edey. Photo: www.sbs.com.au

Malcolm Edey. Photo: www.sbs.com.au

Mr Edey cautioned against the government taking only a demand-side approach to the problem. “Targeted assistance can certainly help particular groups, such as first-home buyers. But without a supply-side response, any generalised increase in demand will just be capitalised into prices.”

And this is what appears to be happening now.

Mr Edey has told the committee that investor loan approvals had swelled by 90 per cent over the previous two years. It has been suggested this is creating a housing bubble – a situation in which the market value of a home exceeds its real value.

The Central Bank has weighed-in with governor Glenn Stevens hinting at regulatory changes to discourage loans to high-risk property speculators. Taking them out of the market would relax prices and add some much needed stability to the banking sector and economy as a whole.

The Australian Prudential Regulation Authority has backed up Mr Stevens. It has released figures pointing to riskier lending practices over the past few years. Such risk-taking puts upward pressure on house prices and encourages the banks to indemnify themselves against losses by charging more while paying less to their customers.

Mr Edey told the committee that housing affordability has traditionally hovered around 20 to 30 per cent of household disposable income. “It has been rising recently and is now at the upper end of its recent range,” he warned.

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