House prices in major cities were at risk of a damaging fall and required "close observation", according to the Reserve Bank minutes released on Tuesday.
"Housing prices were continuing to increase in the larger cities and members considered that the risks associated with this trend warranted ongoing close observation," said the minutes, compiled during the Reserve Bank's meeting in Adelaide on September 2.
There were "risks to future growth that could accompany a large further build-up in asset prices, particularly if that was associated with an increase in leverage".
The RBA noted that housing credit growth had been stronger for investors than for owner-occupiers, "with investor demand particularly strong in Sydney and to a lesser extent Melbourne".
House prices had been rising "at a rapid rate" and auction clearance rates "were above average levels", noted the minutes.
"Additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later," the RBA warned." The main risks in such a scenario would likely be to the stability of the macroeconomy rather than the financial system, "particularly if households were to react to declines in their wealth by cutting back on their spending".
Nevertheless, the RBA judged that the "current stance of monetary policy continued to be appropriate" and was "contributing to sustainable growth and inflation outcomes consistent with the target over the period ahead".
The minutes concluded that "the most prudent course was likely to be a period of stability in interest rates".
In its observation on the Australian dollar - which at the time was 92 US cents - the RBA noted that it "remained above most estimates of its fundamental value, particularly given the declines in key commodity prices".
Overall, the dollar "had offered less assistance to date than would normally be expected in achieving balanced growth in the economy".
The minutes also noted the buoyancy of the commercial property market. "Australian property had been yielding higher rental returns than were available overseas, which had attracted strong demand from both local and foreign investors," they noted.
"This had boosted prices even though rents for some types of commercial property had declined."
The Australian labour market was "subdued" and the unemployment rate of 6.4 per cent was "concerning". This observation was made prior to the shock August jobs figure, which showed unemployment had fallen to 6.1 per cent.
The RBA also queried the accuracy of the unemployment figures, noting "significant measurement issues". "Other labour market indicators suggested conditions had not deteriorated to the extent implied by the increase in the unemployment rate."
Mining investment was expected to "decline significantly" while figures "continued to imply modest growth in non-mining business investment over the course of 2014/15". The weakening Chinese residential property market, meanwhile, "remained a risk to the outlook in China".
Felicity Emmett, chief economist with ANZ, said that "overall, today's minutes continue to suggest that the RBA remains comfortably on hold, with the minutes repeating the message that the most prudent course was likely to be a period of stability in interest rates".
"However, the two key messages that we would take away from today's minutes are that the bank is becoming more uneasy about the pace of house price growth in Australia, and more concerned about the potential for housing market weakness in China to spill over into broader activity."
