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SYDNEY, May 15 (Reuters) - It is not surprising to see first-home buyers being squeezed out by investors and trade-in buyers in Australia as interest rates have fallen, but banks should not solve an affordability issue by lowering their standards, a central banker warned on Thursday.
"As experience overseas has shown, you do nobody a favour by trying to solve an affordability issue by making it easier for people to borrow more than they can reasonably service," said Luci Ellis, head of Financial Stability Department at the Reserve Bank of Australia (RBA).
Speaking at a Citibank housing conference in Sydney, Ellis also said while first-time home buyers will feel squeezed out, this is probably more a cyclical phenomenon than a structural one.
"It is still probably quite disheartening for potential first home buyers," she said.
"As such, it would not be a good outcome if they responded by overstretching themselves to try to get into the market during upswings. As well as being against first home buyers' own long-run interests, that would increase risk in the financial system."
Earlier this month, the RBA kept its cash rate at a record low 2.5 percent, where it has been since August, content that past cuts were percolating through to home building and consumption, while boosting household wealth. (Reporting by Ian Chua, editing by G Crosse)