Sky's not the limit: Barclays has concerns about Australia's housing market.

Squeeze is on: The proportion of new home loans issued to first home buyers was 12.6 per cent in March, just shy of the 12.3 per cent record low of November. Photo: Nic Walker

A senior Reserve Bank official has warned first home buyers against taking on too much debt in order to buy property, saying the squeeze on this part of the market is probably temporary or ''cyclical.''

With first home buyers' share of house sales near record lows, RBA head of financial stability Luci Ellis today acknowledged that many people trying to buy their first property may feel ''squeezed out.''

"It's the trade-up buyers and investors whose demand has increased. Meanwhile first home buyers will feel squeezed out.'':  Dr Ellis said.

"It's the trade-up buyers and investors whose demand has increased.'': Dr Ellis said. Photo: Jim Rice

However, she cautioned first home buyers against overstretching themselves in order to compete with investors and other buyers.

Not only would this be against first home buyers' own interests, it could also increase risk in the financial system, she said.

She also affirmed the RBA's view that house price growth would not return to the boom-time increases of the 1990s and early 2000s.

Speaking in Sydney today, Dr Ellis said that in recent years banks had become more cautious in their assessments of how mortgage borrowers would cope with higher interest rates.

This approach – one that is backed by the RBA – limits lending to first home buyers more than others because they tend to have smaller deposits and lack equity in the property market.

''It's no surprise that as interest rates have fallen, it's the trade-up buyers and investors whose demand has increased. Meanwhile first home buyers will feel squeezed out,'' Dr Ellis said.

''This is probably more a cyclical phenomenon than a structural one. It is still probably quite disheartening for potential first home buyers. As such, it would not be a good outcome if they responded by overstretching themselves to try to get into the market during upswings,'' she said.

It be against the buyers' long-term interests to borrow too much in order to enter the market, she said, and would also make the entire financial system more risky.

''As experience overseas has shown, you do nobody a favour by trying to solve an affordability issue by making it easier for people to borrow more than they can reasonably service.''

Earlier this week, ABS figures showed the proportion of new home loans issued to first home buyers was 12.6 per cent in March, just shy of the 12.3 per cent record low of November.

As the property market continues to benefit from record low interest rates, Dr Ellis also repeated the RBA's view that house price growth would be slower than in the past.

Over the 15 years to about 2005, she said house prices had risen ''noticeably faster than incomes'' - but this was unlikely to occur again.

''This was in large part a transition to a new equilibrium of lower inflation and interest rates, and thus higher debt and housing prices relative to incomes. That transition is over now. Housing prices are therefore going to be cycling around a slower trend than they did in the past,'' Dr Ellis said.

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