Regulators urge cool heads in housing

The corporate watchdog has warned home buyers taking advantage of record low interest rates to be wary.

The comments by Australian Securities and Investments Commission chairman Greg Medcraft came as a political debate raged over the housing price bubble in Sydney and parts of Melbourne.

"The message is ... to be careful when you're taking a mortgage," Mr Medcraft told a Senate estimates committee in Canberra on Wednesday.

He advised home buyers to do their numbers on seven per cent, not four per cent, because it was a more reasonable long-term interest rate.

"History tells us people don't know they were in a bubble until after it was over."

The stark warning followed comments by Treasury secretary John Fraser that the Sydney market was "unequivocally" in a boom.

Mr Medcraft said banks also had a responsibility to set realistic rates.

Australian Prudential Regulation Authority chairman Wayne Byres told the committee its efforts to cool investor demand in housing had weeded out some "less than prudent" lending practices.

APRA's actions had had an impact on the "hotter markets" and he would not rule out state-by-state measures to deal with specific market issues.

Mr Byres urged banks to build loan books on a solid foundation and sound lending standards.

Treasurer Joe Hockey continued the government's upbeat assessment of the housing sector on Wednesday, seizing on new data showing housing investment rising by 4.7 per cent in the quarter and 9.2 per cent over the past 12 months.

"There is clear evidence of a construction response to elevated house prices," he said.

"This additional supply is expected to continue with a large pipeline of housing approvals and record low interest rates."

While there was strong demand in places such as Sydney, there had been a significant increase in supply in other areas.

"You have particular troubles in markets where supply exceeds demand - exhibit A, China; exhibit B, Ireland; exhibit C, the US," Mr Hockey said.

Labor's Ed Husic said it was bad news for home owners when prices spiralled out of control.

"What we want to ensure is that all steps are taken to see some sort of more normal behaviour, less frenzied behaviour," said the MP, whose seat of Chifley lies in western Sydney.