"There is always danger when rates get so low.": ASIC Chairman Greg Medcraft. Photo: Chris Pearce

ASIC chairman Greg Medcraft has sent a warning to investors about buying property in Sydney and Melbourne, saying he fears both cities may already be in a housing bubble. 

In an interview with The Australian Financial Review, Mr Medcraft says the RBA's decision to cut rates to a historic low of 2 per cent has spurred investors' appetite, but he fears a correction will leave them exposed, with self-managed super funds particularly at risk.

"History shows that people don't know when they are in a bubble until it's over," Mr Medcraft said.

"History shows that people don't know when they are in a bubble until it's over": Greg Medcraft. Photo: Paul Rovere

"I am quite worried about the Sydney and Melbourne property markets. In housing, the long-term average income to average price ratio is four to five times, but at the moment it is at historic highs," he said.

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"There is always danger when rates get so low. That's when people start borrowing when they can't afford it. What generally happens is rates start to rise, which affects your ability to pay, and rate rises can actually burst a bubble, so you end up with a double whammy."

Assistant Treasurer Josh Frydenberg says the federal government will restrict borrowing by self-managed superannuation funds to buy investment properties but will not follow a recommendation of the financial system inquiry to ban it outright.

BusinessDay