Moody's has welcomed recent moves by Australia's key lenders to tighten their residential loan criteria, but warned there are still persistent risks in the housing market.
"In our view, these initiatives are credit positive since they reduce the banks' exposure to a higher-risk loan segment," Moody's vice president Ilya Serov said. "At the same time, it is likely that further initiatives will be required."
A new report by Moody's found that the Australian housing market is characterized by elevated and rising house prices, declining mortgage affordability, and record levels of household indebtedness.
To this end, the ratings agency said more would likely have to be done if banks were to address the tail risks embedded in their housing portfolios.
"The growing imbalances in the Australian housing market pose a longer-term challenge to the Australian banks' credit profiles, over and above the immediate concerns around investment lending," the report says.
Mr Serov said it was likely that further initiatives would be needed during 2015 to bring investment lending in line with regulatory guidelines, as well as to adjust lending criteria and capital levels to respond to the rising tail risks embedded in the banks' evolving housing portfolios.
"Accordingly, we expect the banks to further curtail their exposure to high LTV loans and investment lending over the coming months," Mr Serov said.
"Moreover, we expect that over the next 18 months, the banks will gradually improve the quantity and quality of their capital -- likely through a combination of upward revisions to mortgage risk weights and capital increases.
"These considerations, in conjunction with the banks' actions to improve their underwriting standards, support our stable outlook on the major banks'credit ratings."
In recent weeks, lenders including ANZ, Commonwealth Bank, Bankwest, National Australia Bank and Westpac have moved to end discounts on investor only mortgage loans amid wider market concerns that strong investor lending growth is fuelling a speculative property bubble in Australia.
The Australian Prudential Regulation Authority in December urged lenders to limit portfolio growth in investor lending to 10 per cent a year.
Record low interest rates have fuelled concerns of a burgeoning bubble in Sydney property prices as cheap credit encourages speculation in an already heated market.
APRA figures released today show the total value of domestic housing loans in the March quarter was $1.3 trillion, a 9 per cent increase on the same time a year earlier.
Investor loans -- which made up 34.6 per cent of residential loans -- came to $450.2 billion, which is 12.4 per cent higher than a year earlier.
Owner-occupied accounted for the remaining 65.4 per cent of residential loans to households at $852bn, which is 7.2 per cent higher than at the same time a year earlier.