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The Reserve Bank of Australia has warned home owners to be wary of taking on too much debt to buy a property.
RBA governor Glenn Stevens on Friday said that while current levels of household debt weren't "disastrous", he would be worried about an acceleration in credit growth to home buyers.
"It's (household debt) pretty high now and we'd, surely, be asking for trouble if we saw a big step up from where we are," he told federal politicians of the House Economics Committee in Sydney.
"People need to keep in mind that prices don't just rise, they can fall, they have fallen and we need to be careful that we don't take on too much leverage," he said.
Mr Stevens said that while housing affordability had improved in recent years due to interest rate cuts and a soft housing market, buying a home had become less affordable recently due to a runup in prices, especially in Sydney.
He also there was strong demand from foreign investors for houses in Australia's major cities, but the impact on house prices seemed to have been overstated.
"In particular parts of our cities, the role of foreign investors is quite prominent indeed, but I suspect rather less prominent than some of the headlines might suggest," he said.
Unemployment to fall
Mr Stevens also indicated that he was confident unemployment will start to fall this year.
The unemployment rate in January hit a 10-year high of six per cent, and most forecasters, including the RBA say it will go higher.
Mr Stevens said he expected unemployment to peak later this year.
"Unemployment will rise further; I would hope not too much further," he said.
People need to keep in mind that prices don't just rise, they can fall.
"I'd say the unemployment rate will edge up a little bit further yet before we see it peak some time this year."
In recent months, new data has shown that economic growth has been strengthening but employment growth has still been quite weak.
Mr Stevens was asked how long its takes the labour market to respond to changes in economic activity.
"Output leads employment. I'd say that would be true in the future and I'd say, probably, one to two quarters," he said.
Mr Stevens re-affirmed the RBA's forecasts that economic growth will soon pick up and get above three per cent.
He also played down the December quarter spike in inflation.
The consumer price index (CPI), a key measure of inflation, rose 2.7 per cent in the year to December.
"We've had a little bit faster flow-through of the affects of the exchange rate," the RBA governor said.
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