Home prices in Australia’s main cities surged in 2014, deepening concern a possible housing bubble may be forming that could potentially derail a fragile economic recovery.

The country’s property market ran hot again last year with prices nationally rising at the fastest pace in more than three years, fueled by record-low interest rates and growing demand for investment housing.

The sharp rises throughout past year have created some of the most expensive property in the world, fanning concern the market may be overheating and that a sudden crash could make jittery consumers even more nervous about spending.

The central bank has cut rates eight times in the past two years to try to get other sectors such as retail and housing to pick up and to compensate for a fading mining boom that is expected to dent the economy in coming years.

The RP Data-Rismark house-price report for December showed home values rose by 9.8% during the 2013 calendar year. Sydney, the country’s largest property market, posted a 14.5% gain over the same period, while property prices in Melbourne and Perth also made strong advances. In December, home values nationally rose by 1.4% from November.

The housing figures came on the same day data showed manufacturing activity contracted in the last month of 2013. It was the second contraction in a row that erased expansions in September and October.

“This latest snapshot is yet another reminder of the urgency for Australia to put itself on a more balanced and diversified growth path,” said Innes Willox, chief executive of AIG Group, which did the survey.

The disparity between surging house prices and weaker manufacturing highlights the key challenge facing Australia’s economic-policy makers, who must find new sources of growth as the decadelong mining boom cools.

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