The risks surrounding the housing market seem to be easing as dwelling prices find their floor, according to the Council of Financial Regulators (CFR).
CFR said the potential risks to financial stability from falling housing prices in Sydney and Melbourne have somewhat abated, due to the price growth recorded in the past few months. House prices grew by 1.5% in Sydney and 1.3% in Melbourne last month, boosted by the back-to-back rate cuts by the Reserve Bank of Australia.
"In contrast, prices have continued their prolonged decline in Western Australia and the Northern Territory, and so the prevalence of negative equity for borrowers in those regions has continued to rise," CFR said.
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However, CFR said the lending market remained subdued, mainly due to the slow growth in investor loans.
"The major banks have seen slower growth relative to other lenders. Subdued credit growth has been primarily driven by weaker credit demand, though loan approvals have picked up recently," it said.
A separate study by Oxford Economics said that while Australia's high household debt level and poor housing affordability could trigger a recession, the low interest-rate environment could provide protection.
"Over the last five decades, sharp house price corrections have been followed by recessions," said Oxford Economics senior economist Tamara Basic-Vasiljev.
However, she said debt dynamics in Australia have become favourable as household lending slows down.
"Australia is in effect deleveraging, even if from an extremely high level. Its house prices are already reacting accordingly," she said.
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