High household debt and shrinking economic growth are clouding Australia's financial stability, while the property price slump in Sydney and Melbourne could lead to a renewed tightening of credit, the Reserve Bank says.
The RBA said today that while domestic economic conditions remained broadly supportive of financial stability, risks to the household sector had increased over the past six months given weak house prices.
The latest Financial Stability Review said the continued deterioration of the housing market would weigh on already subdued consumption, while also increasing the share of borrowers in negative equity.
"Housing constitutes a large share of households' wealth and further large declines in housing prices could cause households to pull back on consumption, particularly for those who are highly leveraged," the RBA said.
"This, in conjunction with falling dwelling investment, could add to rising unemployment... such a scenario would have adverse consequences for financial stability to the extent that it increases both households' likelihood of default and the losses banks would experience in the event of default."
The RBA said the economic ramifications would be tempered if unemployment remained low and households continued to be able to repay their debt.
But falling prices may mean borrowers find it harder to resolve their situation by selling their properties.
The housing market decline could also increase banks' perceptions of the riskiness of housing lending.
"(This could compound) the somewhat tighter availability of credit seen to date," the RBA said.
The Aussie dollar dipped from 71.30 US cents to 71.16 US cents on the release of the report card, but clawed back the lost ground within 45 minutes.