Australia's financial system is in good shape, although high levels of household debt pose a risk and could "amplify" any slowing in the economy, the Reserve Bank of Australia (RBA) said on Thursday.
If households decided to take a breather after borrowing heavily for a number of years, a period of weak consumption might follow and there would be negative effects on business, the central bank said in a review of the country's financial stability.
"If this were prompted by a deterioration in economic conditions it could amplify what might otherwise have been a relatively mild slowdown," the review said.
"The recent run-up in household debt and residential property prices (in Australia) has increased the risk of such an outcome, although this risk is still likely to be relatively small, particularly given the continuing strong performance of the Australian economy," it said.
Economists say developments in the property market are currently having more influence on Australia's monetary policy than global developments, the Australian dollar or even inflation, which is subdued.
The Reserve Bank tightened policy in November and December after a housing boom that has seen average home prices double in six years. It has since left policy at 5.25 percent as signs emerge consumers responded dramatically to the twin rate increases.
The Bank said there was a "danger" that low interest rates globally could fuel excessive borrowing and unsustainable high asset prices.
That might lead to adjustments in private-sector balance sheets and pose difficulties both for financial institutions and the global economy, it said.
"It is sending some warning signals," said Su-Lin Ong, senior economist at RBC Capital Markets.
"There are risks and a considerable shakeout in the consumer balance sheet - should housing collapse - is possible. This is what the RBA is watching closely," she added.
The Bank said it was "encouraging" that demand for property from investors appeared to be declining. Official figures show property financing for investors fell 15.5 percent in January, the third straight monthly decline.