Mr Chronican told Fairfax Media that he was worried some investors viewed buying property as a "one-way bet".
A key reason for the popularity of housing investment was the tax distortion created by allowing investors to deduct interest payments against other forms of income, he said, adding that Australia would benefit from a debate about negative gearing and a better understanding of the risks involved.
"I do worry that some people behave as if housing is always a one-way bet," he said.
"I think there is a bit of an irrational obsession with housing as an investment class.
“For many investors, they would be better off in assets other than housing."
Mr Chronican’s comments come after leading economist Saul Eslake urged the government to grandfather negative gearing to cool the overheated investor lending market.
Speaking at the Finsia annual conference last month, Mr Eslake said a “simple answer” to the boom in investor lending would be for the government to scrap negative gearing without impacting those who already use it.
“If you grandfather it so that you’re not taking it away from the 15 per cent of the electorate who has it, then my view is: what’s the problem?” he said.
“Surely that would be far more effective in tackling the problem, which the Reserve Bank has identified, without inflicting any harm on anybody else.
“And if the government, or the opposition, were to present it properly, nor should there be a political backlash because they are not taking a privilege away from anyone who is currently enjoying it.”
The Bank of America Merrill Lynch chief economist said his biggest concern over APRA’s use of macroprudential tools is that they either don’t work or unintentionally hurt those who are not the source of the problem.
He added that the rise in house prices is “not doing anyone any good”.
While the RBA’s jawboning over speculative property investment was expected to cool demand, recent figures show investment lending increased in September, strengthening the case for lending curbs.
Meanwhile, house prices in Sydney and Melbourne – two areas of risk identified by the central bank – continue to rise.
The latest RP Data CoreLogic Home Value Index shows Sydney home values increased 1.3 per cent in October, while Melbourne recorded 1.9 per cent growth.