Australians are gambling on a housing boom that is certain to disappoint and they should "sit back and think again", the central bank chief has warned.

I'm using a certain amount of moral suasion to try and get... directly to investors, to make them sit back and think again

Ian Macfarlane Reserve Bank governor

The country's continuing growth is one of the few bright spots among developed nations.

But the growth is being fed by consumer spending and by the explosive expansion of housebuilding and buying, Reserve Bank governor Ian Macfarlane told a parliamentary committee.

While he held off on threatening an interest rate rise from the current level of 4.75%, Mr Macfarlane made it clear things were getting out of hand.

"We fear many investors are just assuming that things will work out, which is a very dangerous thing to do," he said.

"I'm using a certain amount of moral suasion to try and get, not (to) banks, but directly to investors, to make them sit back and think again."

'Bizarre' price leaps

With the stock market still moribund and interest rates at three-decade lows, it is little surprise that Australians are entering the housing market not only as owner-occupiers, but as investors.

But this is precisely what Mr Macfarlane warned was so dangerous.

The rise of more than 25% in building approvals in October, and the 17.3% leap in house prices over the past 12 months, were "almost bizarre", he said.

The correction in housing could already be underway, with rents beginning to fall, vacancies rising and several upscale housing projects in Brisbane and Melbourne being withdrawn through lack of demand.

Straight talking

The inevitable downturn could impact growth - forecast at 3% for 2002 - as people scaled back spending to cover their increased mortgages, he said.

But he reassured MPs that the second half of 2003 should produce a return to fast growth, so long as the drought blighting agriculture did not persist.

Although Mr Macfarlane did not mince his words, there was little to surprise analysts.

"What he has done is reinforce the perception that the market had, so obviously he was very comfortable with that and because of that he hasn't thrown up any curly ones," said Brian Redican, senior economist at Macquarie Bank.

"By mid-next year we should be able to see whether the investment recovery will kick on or whether it will be suspended by the weaker global economy."