BANKS in Australia, like the rest of the country perhaps, have a certain upside-down quality to them. Their share prices broke free from the gravitational pull that dragged down their international rivals’ during the financial crisis. In recent years they have soared as others have sagged (see chart). Now that big banks in other rich countries are regaining their poise, it is the turn of Australia’s to slide. This topsy-turviness may yet continue given the worsening outlook Down Under. Serving a buoyant domestic economy with none-too-fierce competition, and unburdened by flailing investment-banking arms, Australia’s big four lenders—Commonwealth Bank, National Australia Bank (NAB), ANZ and Westpac—used to delight shareholders with bumper dividends. But concerns over their balance-sheets and exposure to Australia’s frothy housing market have caused their shares to dip by 10%-16% in the past month. Annual results released in recent weeks lacked the ebullience of past years, with lending margins slipping and costs ticking up.

Investors fear that the exceptional circumstances underpinning the vibrant returns of recent years are coming to an end. The commodity “super-cycle” that boosted both Australia and its banks has fizzled. Unemployment is creeping up.

The biggest concern is the health of banks’ mortgage books. Home loans have been fabulously lucrative for Australian banks. According to Brian Johnson of CLSA, a brokerage, returns on them top 50%, levels which would make even pre-crisis Wall Street bankers salivate. A concentrated market—the big four dominate finance and move prices in lockstep—and rising house prices have kept margins high and losses low.

No wonder, then, that domestic home loans now represent 40-60% of Australian banks’ assets, up from 15-30% in the early 1990s. Mortgages in New Zealand account for another 5-10%. A growing number of loans are going to property speculators, or to homeowners paying back only the interest on their loan. That could make a downturn disastrous.

House prices have been supported by low interest rates around the world, which have helped funnel money into relatively high-yielding Australian assets (including bank stocks). This has been compounded by cheap money domestically: the central bank cut its main rate to 2% on May 6th, the lowest level ever—down from 4.75% in 2011.

Stress tests in November suggested that a property downturn would ravage banks. Around 80% of mortgages are variable-rate, so even a small rise in interest rates would result in higher repayments for borrowers and, in all likelihood, a surge in defaults. Regulators fret about the lack of diversification in banks, especially given their dependence on foreign money for funding. They want banks to curb growth in the riskiest mortgages and to finance them with more equity and less debt.

A government inquiry into the Australian financial system called for banks to be better capitalised. Dividend growth has slowed as a result; on May 6th NAB announced it would issue A$5.5 billion ($4.4 billion) in new shares, though some of that will go towards extricating it from its misfiring British subsidiary, Clydesdale Bank, which it wants to spin off. Collectively, Australian banks may need as much as A$40 billion in fresh capital to meet regulators’ demands.

The big four are still highly profitable, and their returns will remain better than most despite all the new equity they will have to raise. After all, banks around the world are being forced to fund themselves with more equity. Aussie borrowers are less likely to default on mortgages than American ones, as lenders have a claim on all their assets, not just the property in question. Loan-to-value ratios are stable.

But regulators’ changing tone has brought other concerns to the fore. Credit growth in Australia is slowing, raising the spectre of fiercer competition for market share. Expansion into crowded Asian markets seems difficult. That leaves little scope for the diversification watchdogs want. If they cannot make banks less dependent on mortgages, they will have to find other ways to make them safer.