APRA's Wayne Byres warns of high debt and rising property prices

Wayne Byres, chairman of the Australian Prudential Regulation Authority (APRA), has said financial stability risks from very cheap debt overload and high-cost housing were still present in the economy.

Amid signs of a property recovery in the Melbourne and Sydney property markets, Byres said the market was at an "interesting juncture".

"The downward adjustment in prices has occurred in an orderly fashion and been positive for stability," he said in a speech in Melbourne.

"However, it is worth remembering that the original risks we were concerned about in 2014 - high prices, high debt, low interest rates and subdued income growth - have not gone away, and in some cases increased."

He noted the downward adjustment in prices has occurred in an orderly fashion and been positive for stability.

"It would be unhelpful if recent (and prospective) interest rate reductions led to a resurgence in speculative activity," he said. 

Byres said he did not want banks to cut their credit standards as a way to fire up loan growth.

"When it comes to the supply of credit, it would therefore be unwise for lending standards to be allowed to erode again as a means of generating lending growth. And on the demand side, it would be unhelpful if recent (and prospective) interest rate reductions led to a resurgence in speculative activity," he said.

"Financial stability doesn’t happen by chance," he noted.

Earlier this month, CoreLogic reported Melbourne house prices rose 1.3 per cent in August, while Sydney prices rose 1.5 per cent. National housing prices were up 0.8 per cent in the same month, the first increase since October 2017.

Byres' speech also noted the squeeze on bank profits.

It arose from low interest rates as lenders offset the decline in their lending rates through their deposit portfolios.

Byres said smaller banks, which have a higher reliance on deposit funding, could feel the hit on their profits "more forcefully" than large banks.

He indicated it could affect competition in the market.

"All four Australian major banks enjoy AA credit ratings, and ready access to funding; very few European banks (without explicit government support) enjoy similar ratings

"In 2018, a decade after the crisis, the four Australian majors were ranked in the top 35 banks in the world by market capitalisation.

"Europe, despite a much larger banking system and population, only had four banks in the top 35.

"The return on equity (RoE) of the Australian major banks has certainly declined but has not fallen below 10 per cent, even during the GFC, and is now in the order of 12 per cent; for large global European banks, RoE was negative at the height of the crisis, and has struggled to get much above 5 per cent since then."