The risks of oversupply the Brisbane and Melbourne apartment markets are "coming to the fore", the Reserve Bank warns.
The RBA says the financial system is in good shape overall, particularly with home price growth slower than a year ago, tighter lending standards and slower credit growth to households.
However, the central bank says the risks from apartment oversupply in some markets are now starting to show.
“These risks appear greatest in inner-city Brisbane and Melbourne, where new supply is largest relative to existing dwelling stock,” the Reserve Bank said in its biannual Financial Stability Review on Friday.
“Developers face the risk that off-the-plan sales of apartments in these areas fail to settle due to tighter lending standards for buyers (particularly non-residents or those relying on foreign income) and valuations at settlement below the contract price.”
The RBA said there were already signs that some settlements were coming in below their contract price, though the number of settlement failures was low.
The review said banks had recently restricted lending to borrowers relying on foreign income, which could further trim demand for inner-city apartments.
The central bank also noted that local banks had recently boosted their capital, in line with new standards, but reduced their focus on lower-return activities to meet their return-on-equity expectations over the medium term.
“These behaviours need to be watched closely to ensure any behavioural changes do not materially increase systemic risk,” the review noted.
Meanwhile, the central bank sees the high level of debt in China, despite slower growth and signs of excess capacity in some areas, as the most pronounced global risk.
“While authorities in China have the levels to support growth, using many of them would likely entail a further increase in debt that could increase risks to long-term reform and stability,” the RBA added.