Australian banks will need to focus on mortgage lending regulations to stop the threat of property bubble forming, the central bank said on Wednesday.
The Reserve Bank of Australia (RBA) issued its review of the effect rising property prices were having on the financial sector' s stability.
"Risks in housing and commercial property markets are rising in association with fast price growth in some cities, heightened investor activity and strong price competition among lenders," the RBA said in a statement.
The RBA said low interest rates in advanced economies continue to encourage financial risk-taking. Although this is supportive of economic growth, such activity can contribute to a build-up of financial system vulnerabilities.
"A broad reassessment of risks could lead to a sharp adjustment in asset prices, particularly if investors have not fully adjusted to an environment of lower market liquidity," the RBA said.
The RBA is concerned that lending for investor housing now accounts for close to half of all loans and the consequences of property bubble would hurt the entire economy-wide.
"It is too early to expect a material slowing in investor loan approvals or credit growth," the RBA said.
With interest rates at record lows, the value of Australian property rose 10 percent nationally last year, with the Sydney market up 14 percent.
The rise in demand for property comes as interest rates have been cut to record lows to support an economy suffering from a slow down in the resource industry.
The RBA has indicated that it wants to cut interest rates at least one more time in coming months.