The surge in house prices has put Reserve Bank governor Glenn Stevens between a rock and a hard place.
While the central bank's monthly interest rates decision grabs the most attention, its role is in fact far more complex than controlling the cost of credit.
Its ultimate duty is to maintain "full employment, and the economic prosperity and welfare of the Australian people," alongside financial stability. And as the housing market heats up, possible tensions between these overlapping goals are emerging.
With capital city prices rising at their quickest pace in three years, the RBA this week signalled it remained on guard for signs of unsustainable property growth when interest rates are at record lows.
But aside from "jawboning" the market by reminding buyers to be "realistic" and telling banks to be sensible, its options are limited.
Few believe it can raise interest rates to take the heat out of the housing market, because this would risk hobbling the non-mining recovery.
And even though unemployment is expected to worsen in months ahead, Citi economist Paul Brennan says the hot housing market has now "raised the bar" for further rate cuts.
"The RBA has got a difficult balancing act here," he says. "They want to nurse the economy through this period of falling investment, they want to rebalance the economy and they want housing to pick up."
For more than a year, the RBA has been preparing the economy for the time when mining investment passed its peak, requiring us to find another growth engine.
The central bank expects the vast housing construction industry to play a central role. As more homes get built, it's hoped that other high-employing sectors such as retail and manufacturing will also benefit, as people build and furnish their new homes.
But as the property market gets stronger, with Sydney's annual price gains of 7 per cent a particular concern, the baton change from mining to housing is raising all sorts of tricky questions.
In NSW in particular, the price growth is being driven mainly by investors, who are far more likely to buy established homes. This has the effect of pumping up prices without generating as many positive "spillovers" as hoped.
Although the RBA has dismissed bubble talk as "alarmist," the price growth has put authorities on guard to prevent unsustainable growth in prices.
It's a similar dilemma to one facing many Western countries grappling with the effects of very cheap credit on the biggest asset market of all: houses. In recent decades, whenever interest rates have fallen, it has been followed by a strong jump in house prices.
In the early 2000s, the Reserve responded by progressively raising rates from 4.25 per cent in 2001 to 7.25 per cent in 2008. Bank of America Merrill Lynch chief economist Saul Eslake says this distinguished the RBA from its peers.
"One of the only reasons that we did not have a housing and financial crisis in 2008-09 was that the Reserve Bank was just about the only central bank in the Western world that did not keep interest rates low for too long in the early part of last decade," he says.
But this time, there are doubts over whether it can use interest rates to rein in a red-hot housing market. After all, such a move would likely push up the dollar that the Reserve already believes is higher than it should be.
The high-employing construction industry also argues that any move to jack up rates would threaten to kill off nascent signs of improvement.
Housing Industry Association chief economist Harley Dale says "some, but far from all" of the stimulus from lower rates has been pumped into new home building.
Indeed, the Reserve this month estimated as much as 90 per cent of the windfall from lower interest rates had been used by borrowers to repay debt ahead of schedule.
Housing starts rose 8.3 per cent last financial year, after two years of decline, the HIA estimates. But the recovery is far from broad-based. "We are seeing a relatively strong new home building recovery in NSW and in Western Australia, albeit from a very low starting point," Dale says. "But that's pretty much it. If you net out NSW and WA then you find the market is moving sideways."
Frustrated by media discussion of bubbles, many in the housing industry argue the market is simply catching up after a soft patch.
Dale points out that Sydney's market has experienced relatively modest gains of 40 per cent in the past decade, well below the 90 per cent growth in Melbourne and Brisbane.
The economic debate over house prices is not merely a matter of what the market is doing today, but where it might be in two years.
The RBA has said the full effects of cheap credit are not yet being felt across the whole economy, as cutting interest rates typically has a lag of about a year.
Eslake says it is crucial to have a discussion about ways to rein in housing speculation because the full effect of low rates is only just becoming clear. "Within a year or two the dilemma could become quite acute," he says.
So if raising rates is not the answer, what is?
Eslake points to two countries that have already faced a similar dilemma of rising house prices at a time when rate rises would have harmed the economy: Canada and New Zealand.
In Canada, regulators have changed the rules to require borrowers to pay back new loans more quickly. This effectively restricts how much people borrow without the need to raise rates.
New Zealand's central bank from next month will limit the share of loans banks can make to borrowers to 80 per cent of the property's value.
Eslake adds a third suggestion: abolish negative gearing, which allows property investors to deduct interest costs against other income sources. This delivered $13.2 billion in tax breaks in 2010-11. "I accept that it is not feasible to get rid of it altogether because one in every six taxpayers is a landlord," Eslake says.
"But I do think that abolishing it for new transactions entered into after a given date would be politically do-able."
After promising "no surprises," new Prime Minister Tony Abbott may disagree. But the fact such measures are being discussed underlines the challenges created by surging house prices at a time of cheap debt.
HOUSE PRICES ON THE MOVE