"Less so than other countries in Asia, Australia has not imported US-style, ultra-low interest rates," he said. However, if there is a sharp price drop in China, Australia would be next in line after Hong Kong to feel the impact if this led to a downturn in the Chinese economy. "The risk is the intersection of a non-bank credit boom going into housing," he said. The heat is now coming out of the market there and "prices are falling in 69 of 70 cities across China – everything is softening." S&P's "base case" is that China can "muddle through" with direct intervention from the government, but if not, Australia would be the first to feel the knock-on impact. "The No.1 exposed economy is Hong Kong, but Australia is right after that. Australia is the most-geared into the China investment story."

After the financial system inquiry hands down its final report later this month, banks expect the Australian Prudential Regulation Authority to say whether it will introduce targeted, short-term "macro-prudential" measures to make buying property less attractive for investors. Almost half of all new residential lending in the past 12 months has gone to investors. In Sydney the figure is 60 per cent. The worry is that rent has not risen with property values and if interest rates rise, the squeeze on returns to investors may lead to a sudden sell off. But banks argue the risks now are less than in previous cycles of home price rises. Ken Hanton, director of asset transformation at National Australia Bank, agreed with Mr Gruenwald that China is "one of the [potential] shocks and real risks we face".

He said Australia had had several cycles of fast rises in house prices in the past decade, with some much stronger than the recent jumps in Sydney and Melbourne, But in each case there was no ensuing plummet. "Over the last 10 years we had national house price growth capping out and then falling. In 2007 to 2009 it capped out at just under 15 per cent growth," he said. "Subsequent falls saw growth rates fall to minus 5 per cent. This time around house price growth has slowed and it looks like it has capped out at 11 per cent." If Australia is experiencing a housing price bubble now, there must have been several in the past decade, he said. Other bankers and analysts said the definition of a bubble in prices requires three conditions: high credit growth, reductions in lending standards and expectations of continuing property price rises. Tally Dewan, a securitisation analyst at Commonwealth Bank, said it is hard to know whether people think prices will keep rising. But the proportion of high loan to valuation ratios had in fact been falling, she said, suggesting lending standards were not reducing.

Lending growth has been relatively low because many borrowers had chosen not to lower their repayments even though interest rates had reduced. This means many are well ahead on their loans. ANZ Bank senior economist Felicity Emmett said lending growth is now at about 8 per cent per annum. She pointed out it had been about 20 per cent in 2003 and growth in loans to investors 11 years ago was at about 30 per cent