Australia's central bank Friday welcomed early signs of a slowdown in mortgage investor lending in the country's two biggest cities, but also warned of growing risks in commercial property.
In a periodical review of financial stability, the Reserve Bank of Australia said there are "tentative signs that sentiment may be turning" in the property markets of Sydney and Melbourne.
If it continues, the financial strength of the housing and banking sectors would be enhanced, the RBA said. Still, risk in and around mortgage investor lending remains at above average levels.
Australia's bank regulator moved almost a year ago to highlight a surge in lending to property investors, warning of growing risks the economy. House prices, especially in Sydney have soared over the last year.
The subsequent introduction of new clamps on growth in lending to investors has started to take heat out of the housing market. Some economists are now predicting house prices will fall over the medium term.
Still, the RBA ramped up warnings about the commercial property sector, saying banks are indicating growing caution in lending to residential property developers.
"Risks to residential property developers appear to have increased over the past six months," the RBA said.
Historically, the commercial property sector has been a source of financial instability in Australia, the RBA said.
"Banks report that they are becoming increasingly wary of lending to property developers in markets that look over supplied," it added.
A large volume of apartment construction, currently underway and planned, has continued to grow, and the price of development sites has increased, the RBA said.
Foreign developers have contributed to the growth.
The risk of a downturn in the apartment market is greatest in inner city regions of Melbourne and Brisbane, "which look susceptible to potential oversupply," the RBA said.
The RBA also cast doubt over the future strength of demand for apartments by foreign students, warning that estimates of coming arrivals have been scaled down.
A number of banks have responded to rising commercial property risks by tightening lending standards in the more-at-risk areas, the RBA said.
"The commercial property sector will require continued close monitoring for some time yet," the RBA added.