The latest contributions are RBA deputy governor, Phil Lowe, making a point about general bubble danger in a speech and ASIC chairman Greg Medcraft straying a little from his actual remit to warn about Sydney and Melbourne housing investment. More important but overshadowed by the federal budget circus over the past week-and-a-bit were stirrings by the RBA and the Australian Prudential Regulation Authority. Low interest rates tempt buyers to borrow more. The cost of an extra $100,000 at 4 per cent on a fixed-interest loan is less than $80 a week. What's that when you're already in for $750,000? But if the bank declines to lend you that extra $100K… As the RBA has noted several times, the bubble is a purely Sydney phenomenon. Prices here are boiling, Melbourne is merely warm and the rest of the somewhere between tepid and cold. Exhibit A from the RBA is already out of date after another few weekends of fevered auctions with record clearance rates. It shows Sydney housing prices over the past six months heading back up towards an annualised growth rate of 20 per cent.

Melbourne ran hard above that rate on the early GST stimulus package and then paid the price in 2011 and 2012. There are a number of factors pushing Sydney so much harder this time round. It would be nice if there was a single guilty party – foreigners, investors, negative gearing, local government, capital gains discounts, cheap money, population growth – but it's much more complicated than that with all those and more playing roles. What is obvious at this stage of the clamour is pressure of greater numbers of buyers than available stock. Exhibit B from the RBA shows Sydney simply doesn't have land – and there's less now than when the graph was plotted.

The RBA's monetary policy statement reported with understatement that unsold lots are most scarce in Sydney and south-east Queensland, "where the Bank's liaison contacts have suggested that developers are having difficulty obtain further suitable land approved for development." (Yes, south-east Queensland is being widely tipped as the next region for price growth. Part of that tipping comes from the extent of the gap that has opened up between median Sydney and Brisbane house prices. What might get a shoebox reasonably close to the Sydney CBD now buys a house in Brisbane.) "Some liaison contacts have also raised concerns about the availability of land for apartment developments in Sydney, as the stock of suitable sites has been gradually depleted over recent years," said the bank. Exhibit C from the RBA shows a couple of traditional indicators of real estate heat that can't keep pace with the reality of the market.

The measures of "vendor discount" and "days on market" are only for private treaty sales – a minority of sales. If it was possible to accurately measure, I'd wager the real Sydney market has a vendor premium rather than a discount and days on the market aren't keeping pace with official auction campaigns. Sydney enjoys the Manhattan effect – it's where people want to live and there are physical limits to the city. It's the first choice of the migrants who provide roughly 60 per cent of our population growth. Millions agree with Paul Keating's dictum: "If you're not living in Sydney, you're camping out." To an extent then, Australia has the same problem as New Zealand – a dwelling price bubble concentrated in one city. The Reserve Bank of New Zealand is specifically targeting Auckland with a demand for higher deposits, not the rest of the country where relatively little is happening, while the government is introducing a capital gains on some residential property sales and tightening a touch on foreign buyers. Last week's federal budget and the RBA statement spell out the nation's reliance on house prices continuing to rise, despite Sydney's dangerous excess. To achieve Hockey's hoped-for economic growth of 2.75 per cent in the next financial year, Treasury predicts our investment in new housing and renovations to continue to grow in the new financial year at this year's very strong rate of 6.5 per cent and a still-solid 4.5 per cent in 2016-17.

What's more, the more important prediction of household consumption rising from 2.75 per cent this year to 3 per cent next and 3.25 per cent in 2016-17 is based on consumers being carried away with the "wealth effect" – the two-thirds of us who own dwellings are supposed to feel richer as our home prices rise and therefore save less, borrow more and spend up. For a bad reason, the RBA even thinks there's some up-side to its wealth effect forecast: "One reason is that supply constraints, particularly in Sydney, may limit the extent to which new dwelling investment can satisfy growing demand, which raises the possibility that housing prices will grow more quickly than forecast." Spare us. The RBA doesn't have the RBNZ's powers, having surrendered many of them to APRA when it was established. Nonetheless, our regulatory siblings continue to work closely together. For the past year RBA governor Glenn Stevens has been referring questions about the suitability of macroprudential controls to APRA.

Enter APRA chairman Wayne Byres with a speech last week to the Customer Owned Banking Association. While there had been a lot of market reaction to the idea of tougher overall bank capital requirements, Byres' hot poker was being pointed at specific lending practices by Australia's banks and other deposit-taking institutions (ADIs). Byres observed that, just as most car drivers think they are of above-average ability, our ADIs invariably claim their lending standards are more conservative than most. Without going as far as actual shadow-shopping to check on what the ADIs were up to, just a hypothetical borrower survey put to the ADIs by APRA found plenty of evidence the ADIs' confidence was misplaced. "The outcomes were quite enlightening for us – and, to be frank, a little disconcerting in places," the chairman said. "The first surprising result from our review was the very wide range of loan amounts that, hypothetically, were offered to our borrowers. It was not uncommon to find the most generous ADI was prepared to lend in the order of 50 per cent more than the most conservative ADI.

And that was just the start of it. ADIs differed widely on how they measured borrowers' living expenses and ability to service loans. "Of major concern were a few ADIs who opted to make their credit assessment based on a lower level of living expenses than that declared by the borrower," Byres said. "That is obviously a practice that should not continue, and ADIs should be making reasonable inquiries about a borrower's living expenses. In fact, best practice (and intuition) would be to apply minimum living expense assumptions that increase with borrower incomes; this was a practice adopted by only a minority of ADIs in our survey." APRA found some ADIs weren't discounting borrowers' other income sources, such as bonuses, overtime and investment earnings when working out serviceability, but of particular importance for would be investors: "Another area of interest was the discount or 'haircut' applied to declared rental income on an investment property. The norm in the ADI industry seems to be a 20% haircut, but we noted in our exercise that some ADIs based their serviceability assessment on smaller, or even zero, haircuts. Bearing in mind that the cost of real estate fees, strata fees, rates and maintenance can easily account for a significant part of expected rental income, and this does not take into account potential periods of vacancy, the 20% norm itself does not seem particularly conservative. We also came across a few instances in which ADIs were relying on anticipated future tax benefits from negative gearing to get a borrower over the line for a mortgage." That sounds to me like a regulator who is about to whack the banks with tougher standards, with investors and would-be investors finding they won't be able to count a great deal of their rental income towards their ability to service a loan.

Another foreshadowed tightening was to ensure ADIs included existing loans in their assessment of a borrower's ability to handle higher interest rates down the track on a new loan. "As of earlier this year when the survey was conducted, only about half of the surveyed ADIs applied such a buffer to existing debts (all applied some form of buffer to new debts). I confess to struggling to see the logic of such an approach – after all, any rise in interest rates will at some point in time affect the borrower's other debts just as they will for the new loan being sought." And then there is the area of particular interest to the RBA: interest-only loans. Most ADIs weren't calculating the ability of the borrower to service principle-and-interest loans for the life of the loan, apparently assuming it would always be interest only. Forcing principle-and-interest serviceability on interest-only loans, combined with the other tightenings, should reduce the amount ADIs are able to lend to borrowers. "We have been asked whether APRA is trying to standardise mortgage risk assessments or impose a common 'risk appetite' across the industry. In fact, we do think it important that ADIs adhere to some minimum expectations with respect to, for example, interest-rate buffers and floors, and adopt prudent estimates of borrower's likely income and expenses. In that regard, to the extent we are reinforcing a healthy dose of common sense in lending standards, greater convergence is probably warranted."

Byres concluded with two specific warnings of an effective tightening of lending standards: "When our December letter was issued, a number of ADIs were quick to point out they were already utilising a floor rate of 7 per cent and a buffer of 2 per cent within their serviceability assessments. Leaving aside that our letter suggested it would be good practice to operate comfortably above those levels, if the buffers are being applied to overly optimistic assessments of income, or only to part of the borrower's debts, they do not serve their purpose. "Second, because much of the attention given to our December letter has focussed on the 10 per cent benchmark for growth in investor lending. I want to emphasise that our analysis goes much broader than just investor lending growth, and captures ADIs' lending standards and risk profile across the board. Investor lending aspirations will only be one factor in our consideration of the need for further supervisory action." So there, you bankers depending on the richly-rising housing market, you've been told. Without specifically venturing into macroprudential policy, APRA seems intent on tightening lending standards, mainly with the effect of reducing how much a borrower can borrow.

In cities and towns where housing is inexpensive, that should not stop the party the RBA and treasury is depending on. In the single city where housing is very expensive, tighter credit standards and APRA breathing down banks' necks just might balance the impact of the latest interest rate cut.