Head of the Financial System Inquiry, David Murray has warned entry-level buyers the housing market is going to get worse.

Speaking at the Australian Centre for Financial Studies lunch, in Melbourne on Wednesday, the former Commonwealth Bank Chief Executive warned those considering their first mortgage.

“I think APRA (Australian Prudential and Regulation authority) and the RBA (Resrve Bank of Australia) have a problem here,” said Mr Murray. “It’s hard for people to get into housing, so it’s a serious issue. It’s noticeable particularly as interest rates get lower and lower.”

Mr Murray stressed the need for a strong financial system. He warned regulators that the cash rate could fall a full one per cent this year.

Should interest rates continue to drop or the unemployment rate (currently at a 12-year high of 6.4 per cent) continue to rise there will be real trouble.

“If interest rates continue to fall I think there will have to be prudential offsets to limit the risks in the housing market.

“You can calculate for each quarter of a per cent (movement), you can add how much affordability that adds, which (then) comes through on price.

“There only has to be a noticeable pick-up in unemployment and this can turn very, very difficult.

“We already have a high-income to price ratio for houses in Australia and it’s just not the case that we’re immune from trouble here.”

In short, Mr Murray was urging APRA to adjust the way risk is calculated on home loan applications:

“In other countries they’ve limited loan-to-value ratios for properties. Singapore and Hong Kong have done that for example.”

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