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Reserve Bank governor Philip Lowe may be losing sleep over house prices, but the head of one of the nation’s biggest banks doesn’t believe there’s a housing bubble in Sydney or Melbourne.

Like federal Treasurer Scott Morrison, Westpac boss Brian Hartzer thinks the sharp rise in property valuations is due to supply constraints.

Facing a parliamentary committee in Canberra on Wednesday, Mr Hartzer says in his mind a housing bubble is when people believe prices only go up, start borrowing to buy a house and sell it within a year, only to buy a bigger property.

"That to me is the definition of a bubble, a credit-fuelled speculative bubble," he told MPs.

"I don't think that's what's happening in Sydney or Melbourne."

The Westpac boss was the last big bank chief to appear in the latest parliamentary review of the big four banks.

During a hearing on Tuesday, Commonwealth Bank chief executive Ian Narev said he did not believe home buyers thought the market was overpriced.

He thought they were saying it was difficult to afford it, a view he shared.

The treasurer will make housing affordability a major focus of his May budget but says supply is a key factor, not just for first-time buyers, but for low-income families and renters more generally.

Mr Hartzer said what was happening in the nation's two biggest cities is the consequence of severe supply constraints running into a significant step up in demand from foreign buyers.

"There has been a significant ramp-up in construction and a big chunk of that has probably been targeting overseas buyers whose desire for the nature of the property isn't necessarily the quality local buyers would want," he told MPs.

However, as a result of a crackdown in China on outflows of capital, a number of these developments where foreign buyers have put money down on an apartment are now having trouble settling.

"That is potentially creating a bit of a glut of supply which may or may not be what the local buyers want to buy and are taking a lot longer to clear."

Mr Hartzer's comments came after a recent warning by the Organisation for Economic Co-operation and Development of the potential danger facing the Australian economy from ballooning house prices.

The Paris-based organisation reiterated the warning in a new report on Tuesday, not just for Australia, but also for Canada, Sweden and the UK, which have all endured a similar housing experience.

"As past experience has shown, a rapid rise of house prices can be a precursor of an economic downturn," it says.

 
  • Where a build up in house prices could be problematic is where the economy suffers a downturn or where interest rates edge up and highly leveraged households feel squeezed.

    Australia's high level of household indebtedness leaves us vulnerable in the case of economic shock.

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