"We believe that margin performance should be more supportive in 2017 as banks benefit from recent repricing initiatives, which should provide a full-year tailwind," said Macquarie analyst Victor German.

Rise of shadow banks

As so-called "shadow banks" report increased demand for credit and higher residential mortgage-backed securities issuance (RMBS), Mr Byres said he expected APRA's tighter controls on the banks to push more borrowers to lenders falling outside APRA's jurisdiction over "authorised deposit taking institutions".

He reiterated warnings that banks should not let the growth of the "warehouse facilities" provided to shadow banks to exceed growth in their broader loan books.

"We don't want the risks we are seeking to dampen coming onto the bank balance sheets through the back door," he warned.

APRA chairman Wayne Byres warned that property prices will fall in a full economic cycle. Daniel Munoz

Less than two weeks before the federal budget, in which policies on housing affordability are expected to be the centrepiece, Mr Byres said tax policy, planning laws and foreign investment rules, in addition to interest rates, all affect the property market and APRA's influence is therefore limited.

"Property prices are driven by a range of local and global factors that are well beyond our control: whether prices go up or go down, we are like King Canute, unable to hold back the tide," he said, referring to the 12th-century story.


Nevertheless, he reiterated comments that the macroeconomic environment is creating rising risks. High house prices, high household debt, low interest rates, low income growth and high competitive pressures among banks make it "easy for borrowers to build up debt. Unfortunately, it is much harder to pay that debt back down when the environment changes," he said.

Mr Byres described APRA's measures on the banks as "a tactical response to evolving conditions, designed to improve the resilience of bank balance sheets in the face of forces that might otherwise weaken them".

Susan Lloyd-Hurwitz, the CEO and managing director of Mirvac, warned policymakers to be wary of changes that sought to treat the Australian housing market "as one homogenous whole".

It was an "entrenched undersupply" that was driving prices, she said, which required a co-ordinated approach to taxation planning reform, better co-ordination between states and federal policy and a new approach to rental markets. The developer also called for faster approvals of land for development and zoning reforms.

"We have got to get better at planning," she said.

Graeme Ross, the global head of real estate at Commonwealth Bank of Australia, said conditions in Brisbane are getting more concerning, given more supply, concentrated developments in the inner-city and rising vacancy rates.

Overall, he said CBA remained "cautiously optimistic about real estate markets in Australia. It is a time, though, that we need to be cautious. We need to think about technological change, and also with a lot of global capital coming into the market, we are much more subject to a range of external factors."