Sydney has been warned by a Reserve Bank of Australia (RBA) official that a combination of factors could see house prices rise even further in the city.

In an address at the Australian National University earlier this week, RBA assistant governor Christopher Kent said dwindling levels of land suitable for residential development would place upward pressure on prices.

“In some cities, stocks of unsold lots suitable for development appear to be unusually low,” Dr Kent said.

“Shortages are most evident in Sydney, where greenfield land releases have not kept pace with recent strong demand.”

Dr Kent said the RBA also had concerns about the stock of suitable sites for apartment developments in Sydney.

Another factor likely to result in higher house prices is an increase in construction costs.

“Inflation of building material prices has risen and the Bank's liaison suggests that some builders have increased margins over the past year or so,” Dr Kent said

“Consistent with this, inflation in new dwelling costs has risen to be almost 2 percentage points above its average.”

Dr Kent’s points are backed up by the minutes of the RBA’s June Meeting, where the issue of housing supply played was a topic of discussion.

Dwelling investment looked to have grown strongly in the March quarter and forward-looking indicators of construction activity pointed to a further pick-up,” the minutes read.

“Noting that housing price growth in other cities and regional areas had declined over recent months, members discussed the strength and composition of underlying supply and demand conditions in different parts of the housing market.

“They also observed that there was a relatively low stock of dwellings for sale in Sydney and Melbourne and that dwellings took only a short time to sell.”