The hot housing market in Sydney and Melbourne is the key risk facing Australia's banking system, according to global ratings agency Moody's, which said it welcomes stiffer regulations on local lenders.
Moody's today said the risk posed to Australia's banking system by the housing market in Sydney and Melbourne was rising and a "key" downside threat to financial stability.
But recent regulations imposed on the banks by the Australian Prudential Regulation Authority would help ensure lending standards remained prudent, helping the ratings agency maintain a stable outlook for the banking system.
"We see the strong appreciation in housing prices, particularly in Sydney and Melbourne, as a key and rising tail risk for the Australian banking system," Moody's vice president and senior credit officer Ilya Serov said.
The latest figures from CoreLogic-RP Data showed house prices had increased 11.1 per cent over the 12 months to July. In Sydney alone, dwelling prices had surged 18.4 per cent -- the fastest pace in 13 years.
Meanwhile, Melbourne home values rose 4.9 per cent in July, the fastest pace of growth in any month since the data set began in 1996.
The rising imbalances in the housing market were a notable downside risk over the next 12 to 18 months, Mr Serov said.
The ratings agency said recent moves by banks to restrict rampant property investor lending and hike interest rates on their loans, along with a move to hold higher ratios of capital on their books, would provide important support for the system while Australian economic growth remains "under pressure".
Mr Serov said the sharp increase in the proportion of residential investment lending over the past 18 months represented a "material downside risk".
CoreLogic yesterday said investors now made up more than 50 per cent of the buyers in the property market, and more than 60 per cent in New South Wales.
Australian lenders have been following the guidance of the banking regulator APRA, which has imposed an annual 10 per cent speed limit on investor lending growth, and an increase to capital reserve ratios to 25 per cent, up from around 16 per cent, to shore up stability in the financial system.
Mr Serov welcomed the rule changes, although he said their effect "may take some time to bear fruit".
The agency is expecting the Australian economy to grow at a below-trend rate of 2 per cent this year and 2.5 per cent in 2016, as falling resources investment and weaker terms of trade weigh.
But Mr Serov said the outlook for Australia's banking system, on the whole, was stable. The banks'"entrenched market power" and "healthy balance sheets" should help them retain their strong credit profiles, while recent regulatory changes will shore up the local banks relative to their global peers.