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One third of mortgage owners have less than a month's buffer against financial instability, the Reserve Bank has warned, in a review highlighting increased risks in the heated Sydney and Melbourne property markets.
The RBA's half-yearly financial stability review, released on Thursday, also took aim at the noticeable rise in investor credit, stating a decline could trigger a sharp downturn in the market.
Government's new housing battle
The Treasurer's idea to allow first homebuyers to access their super to get into the market, has been criticised from all sides, including within the Coalition.
"The concern is that investors are likely to contribute to the amplification of the cycles in borrowing and housing prices, generating additional risks to the future health of the economy," the RBA said.
"Periods of rapidly rising prices can create the expectation of further price rises, drawing more households into the market, increasing the willingness to pay more for a given property, and leading to an overall increase in household indebtedness."
According to the RBA, aggregate mortgage buffers are high, at about 17 per cent of outstanding loan balances.
"But these aggregate figures mask significant variation across borrowers, with available data suggesting that around one-third of borrowers have either no accrued buffer or a buffer of less than one month's repayments," the RBA found.
"Those with minimal buffers tend to have newer mortgages, or to be lower-income or lower-wealth households".
The RBA's assessment follows Treasurer Scott Morrison's push for regulators to crack down on investor loans after they rose to more than 50 per cent of all loans in January, amplifying market risk and entrenching the housing affordability crisis.
House prices surged 1.4 per cent across Australia in March, pushing annual price growth to 19 per cent in Sydney and 16 per cent in Melbourne.
Of particular concern to the RBA was the rise in interest-only loans, which now represent 23 per cent of owner-occupier lending and 64 per cent of investor lending.
"Interest-only lending has the potential to increase households' vulnerability in part due to the higher average level of indebtedness over the life of an interest only loan compared with a regular principal-and-interest loan," the RBA stated.
TD Securities strategist Annette Beacher observed that "interest-only" lending was mentioned 17 times in the report.
"This report is a not-subtle threat against rising 'risky' investor mortgages."
The RBA also took a swipe at the big four banks for poor culture that led to the financial planning and life insurance scandals exposed by Fairfax Media and Four Corners.
"International experience has shown that banks that allow or encourage a culture of excessive risk-taking can pose significant harm to financial stability if poor culture becomes pervasive," the RBA stated.
It said banking regulator the Australian Prudential Regulation Authority had found in some cases, "banks allowed a culture to develop within their core banking divisions over recent years that prioritised protecting market share ... over sound lending practices".
On the global economy, the RBA said the outlook had improved over the past six months, though some longstanding vulnerabilities in the US, Europe and China remain.
"Risks related to some international political developments have increased, though markets have generally reacted to events in an orderly manner so far," the RBA stated.
"While still under discussion, some of the new US administration's policies, particularly in relation to trade and financial regulation, could adversely affect global economic growth and financial stability."
The RBA said the influence of "Eurosceptic" parties in elections to be held later this year could undermine the resilience of European banks and sovereign debt markets.
On China, the RBA warned of rising levels of debt "with particularly strong growth in lending from the less regulated and more opaque parts of China's financial system."