Outgoing Australian Prudential Regulation Authority (APRA) chair Wayne Byres says falling house prices have both financial and social benefits, and he predicts the banking system will weather the property slump caused by rising interest rates.

Byres, who is stepping down from APRA at the end of this month after eight years in the job, said in his final public speech on Wednesday that the “Australian obsession” of housing had been a constant feature of his time running the banking regulator.

Byres told a business lunch in Sydney that house prices were falling faster than many had expected a year ago, and homeowners who were highly geared or had low levels of equity in their home could be “particularly challenged.” But he suggested the falls should not be a surprise and banks could weather the slump, adding that lower house prices had a positive side.

“Australia now finds itself in an environment we all knew would eventually come: one of rising interest rates and falling house prices. Both are occurring sooner, and at a faster rate, than most people anticipated a year ago,” Byres said at a Financial Services Institute of Australasia event.

While some borrowers would find themselves in stress, Byres said it was “not all downside” from falling house prices, noting that Australia’s high property prices had led to high household indebtedness and a housing affordability problem.

“Australian housing prices are undeniably high, and a sustained lower level of prices would be no bad thing overall,” Byres said.

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“As a nation, we fret about housing affordability. The only way to genuinely improve affordability over time is to keep the rate of increase in housing prices below that of our incomes,” he said.

“From a narrow financial stability perspective, lower housing prices facilitating lower debt levels would be no bad thing. From a broader societal perspective, I suspect there would be many more benefits from people having to use less of their income to simply put a roof over their head.”