The recent strong growth in the housing market, coupled with record low interest rates, has raised fears about a real estate price bubble.
With house prices at their highest in three years and mortgage lending picking up, questions have been raised about how to spot an overheated property market and what regulators and central banks could do to prevent them.
Citi analysts said on Thursday the strength of the housing market could also limit the scope of the Reserve Bank to ease interest rates further as the economy struggles through a transition away from mining-led growth.
Fears of a bubble - a factor in the global financial crisis - are not isolated to Australia. New Zealand has tightened lending conditions, while the Bank of England said on Wednesday it was closely watching property price rises in Britain.
Last week, the Reserve Bank hosed down fears of a bubble as "unrealistically alarmist", saying prices were rising in line with incomes over the past decade.
While a definitive checklist on what constitutes a housing bubble does not exist, economists say four factors - property prices, credit growth, lending standards and speculation activity - are central to any analysis.
A rapid rise in housing prices is seen as one of the first indicators that a housing market is approaching bubble territory. RP Data-Rismark figures showed Australian capital city house prices rose 4 per cent in the three months to August, the largest growth since April 2010. For Sydney, home prices are projected to soar by 15 to 20 per cent next year, following a growth of 9 to 12 per cent this year, SQM Research said.
The European Central Bank estimated that during housing bubbles in Ireland and the US between 1995 to 2005, homes prices more than tripled in Ireland and soared by 70 per cent in the US. The prices sank by more than 30 per cent when the financial crisis hit.
House prices in Australia are considered to be expensive, but do not appear to be deviating greatly from existing drivers in the property market such as the above-average population growth, an actual excess of demand over supply, a gradual lift in construction, low vacancy rates and rising rents, analysts said.
Strong credit growth - driven by low interest rates and loose lending standards, which could then lead to mortgage borrowers taking on more debt and risk - is cited as another indicator.
"The word bubble somehow implies artificial. A clear source of artificially inflated housing prices is leverage, [or] borrowing," NAB chief markets economist Rob Henderson said. "If money is freely available in the economy, as was the case in the US in the run-up to 2007, then of course people can borrow freely at very low rates."
Australia's cash rate is at 2.5 per cent - a 60-year-low, following moves by the Reserve Bank to lift the housing sector. But while credit growth has lifted off its historic lows from earlier this year, it remains very soft relative to previous years.
Closely linked to a sharp rise in credit growth are banks' lending standards, with looser guidance expected to spark strong growth in the volume and turnover of property, which in turn could overheat the housing market. Both volume growth and housing turnover remain light at this time, the RBA and Australia's largest mortgage lender Commonwealth Bank said.
However, the modest growth in credit poses a difficulty for mortgage lenders, and could entice them to loosen lending standards to draw in more clients, another risk the RBA has warned about.
One sector of the housing market that has attracted the attention of the Reserve Bank is the growth in the number of investor-owners. UBS analysts also warned on Tuesday the "significant growth" in negatively geared investment property in the past two decades was of concern.
A new source of property investment - and speculation - could come from the self-managed superannuation fund sector, which has increased its property holdings after legislative changes.
Using the above indicators, analysts said Australia's property market has yet to hit a price bubble. But the warning signs - such as the potential growth of speculators - are there, the Reserve Bank has said.
"The RBA have provided a road map of things to watch for," Deutsche Bank economist Phil O'Donaghoe said.
"But certainly the RBA hasn't gone so far as to conclude that there's an outright concern [about the housing market]."