Bankers deflate bubble fears

Two of the country's most senior bankers have acknowledged the risk of the housing market overheating in an environment of strong demand and record-low interest rates.

As the property recovery gathers pace, Commonwealth Bank boss Ian Narev and ANZ chairman John Morschel on Wednesday hosed down concerns Australia was in a bubble, arguing banks continued to behave prudently.

But they also signalled they were aware of the risks that rapid price growth could become dangerous if it continued for an extended period.

Mr Narev said fears about the housing market overheating were justified, but he was not yet concerned about a bubble forming.

"We all know that in a sustained low-interest rate environment these risks exist, and therefore we have got to be alive to them," Mr Narev said at a lunch in Melbourne.

"The best defence for any of these sorts of bubbles in relation to bank activity is good, conservative, prudent bank management. I think we do have that among Australian banking leaders."

Mr Morschel, speaking at a function in Sydney, also dismissed concerns the market was in bubble territory but acknowledged the risk of one forming.

"I don't believe it's a bubble. It might be two years down the track but I don't believe it's a bubble at the moment," he said.

RP Data Rismark figures on Tuesday showed Sydney home prices rose 2.5 per cent last month and 5.2 per cent in the last quarter. Melbourne also rose 2.4 per cent in a month and 5 per cent in the quarter.

Echoing the views of most market economists, Mr Morschel argued price rises were justified by Australia's failure to build enough homes to keep up with population growth.

Price gains had been especially strong for homes selling for under $1.5 million, while the top end was not moving "anywhere near as much", he said.

With some economists calling for tighter rules to rein in higher-risk lending, Mr Narev said it would be also foolish not to expect the government to increase regulation in Australia's banking sector.

Mr Narev welcomed government plans to launch a financial system inquiry, and said debate about banking regulation was vital to building confidence in the financial sector.

"In order to engender confidence we've also got to be prepared to take a realistic view of regulation," he said.

"Outside Australia the world suffered as a result of the actions of financial institutions. If we believe therefore that the response should be deregulation we are extraordinarily naive."

In New Zealand, the central bank sought to rein in rapid house price growth by capping the share of home loans banks can make to buyers who borrow more than 80 per cent of the property's value.

Mr Morschel said banks that ignored the rules risked losing their banking licence, an approach he thought was excessive.

Mr Narev was speaking after returning from Prime Minister Tony Abbott's business delegation to Indonesia. He said the visit "sent a very strong signal to Indonesians with whom we want to do business about the importance to that economy and to not only our businesses, but to Australia more broadly".