Some Australian banks will soon require "behavioural adjustment" to tighten loose mortgage lending, which is overheating house prices and stoking the threat of instability within the economy.
The warning came from the Reserve Bank of Australia on Wednesday, which said in a review of financial sector stability that risks around house prices are increasing.
"Risks in housing and commercial property markets are rising in association with fast price growth in some cities, heightened investor activity and strong price competition among lenders," the RBA said.
Having introduced measures in December designed to cool lending for investor housing, which now accounts for close to half of all loans, the Australian Prudential Regulation Authority now looks set to tighten its focus on individual institutions, the RBA said.
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After a recent period of investigation into lending practices, some banks "are likely to attract the attention of the regulators". These measures and subsequent "behavioural adjustments" should help to ensure that prudent lending standards are maintained, the central bank said.
The consequences of an overheating of the housing market would be economy-wide, the RBA said.
APRA has already introduced stricter lending criteria for property investors and offered guidelines to banks on how they should moderate lending. The regulator said recently it would contemplate instructing individual banks to carry higher capital weights if lending was not moderated.
"It is too early to expect a material slowing in investor loan approvals or credit growth in response to APRA's measures," the RBA said.
However, the RBA remains optimistic that APRA's intervention in the home loan market will be enough to blunt any risk to the wider economy.
House prices have grown by around 10 per cent nationally in the last year, with Sydney prices growing by close to 14 per cent. The jump in demand comes as interest rates have been cut to record lows to support an otherwise moribund economy.
The RBA has indicated that it wants to cut interest rates at least one more time in coming months, with financial markets pricing in a second by December. Falling commodity prices are slamming the economy, damping business and consumer confidence with unemployment now at its highest level in more than a decade.
The RBA cut interest rates in February, coming off the sidelines for the first time in 18 months in response to the weakness in the economy. Its benchmark rate now stands at 2.25 per cent.
-- with AAP