No house price bubble says RBA

The Reserve Bank of Australia (RBA) has downplayed concerns over a house price bubble in Australia, but painted a bleak picture for heavily indebted governments.

RBA deputy governor Ric Battellino said on Tuesday house prices in Australia, relative to income, were reasonable.

"People feel that house prices in Australia are quite high and that's quite often because the ratio of house prices to income that are published for Australia tend to focus mainly on prices in the cities, and they are quite elevated," Mr Battellino said in response to a question at a business function in Sydney.

"But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries."

Mr Battellino said recent events in Europe were worrying because when governments get into financial trouble there is no one to bail them out.

"So the developments in government debt are, I think, a worry because it's not clear to me that they can be solved certainly any time soon.

"If they are going to be solved through fiscal tightening, that actually means some quite difficult periods ahead for some of these economies."

Mr Battellino said Australia didn't have the same problem as European economies because its government debt was low although the fallout from Europe could be felt in the Asia region.

"Certainly Australia's own government debt position is very good, we've one of the best (debt position) in the world.

"But all through the region where we are and our trading partners, government debt is not a problem."

Mr Battellino said although this part of the world would be least affected by the European debt problems, he could not predict how serious any effect would be.

"I really can't say, it depends on what measures are taken to deal with these issues and where it heads to from here."

The European debt crisis was one of the issues taken into account by the RBA when it decided to leave the cash rate on hold at 4.5 per cent at its June 1 board meeting, he said.

Mr Battellino said earlier in a speech at the business function that evidence suggested increased levels of debt had not left Australian households overexposed despite some pockets of stress in the economy.

"All countries have experienced rises in household debt ratios over recent decades," Mr Battellino said the speech.

"More recently there are some signs of increased housing stress in south-east Queensland and Western Australia, again following sharp rises in house prices in these areas," he said.

Most household debt is being raised to buy assets, while debt is being taken on by households in the strongest position to service it.

He noted financial assets held by households had grown to the equivalent of 2.75 years of household income, up from 1.75 years of income in the early 1990s.

Households in the top two income quintiles accounted for 75 per cent of all outstanding household debt.

Mr Battellino was speaking to the Financial Executives International of Australia at the law firm Clayton Utz.

The event was closed to the media. An embargoed copy of the speech was provided and a transcript of the question and answer session was issued several hours later.

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