"It could unwind in an orderly manner as we are seeing in parts of Western Australia and Queensland," Mr Jain said.

But he stressed prices could keep rising despite the Australian Prudential Regulation Authority's moves to restrict growth in interest-only loans and shore up serviceability standards.

"It's hard to see any immediate and substantial impact on house prices," Mr Jain said.

Mr Morrison used his address to the Summit to back the regulator's decision to intervene in the lending market for a second time since 2014, citing the potential for instability in the economy.

"The decision by APRA to announce these measures was the right one," he said. "Australian government regulators will continue to monitor risks to household balance sheets, and promote sound lending practices by Australian financial institutions, fully backed by the Turnbull government."

Arrears risk rising

Risks as measured by the number of Australian households with residential mortgages that were more than 30 days in arrears have risen significantly, with data released by Moody's Investor Services on Thursday revealing a 32-basis-point increase to 1.52 per cent in November 2016, from 1.3 per cent in November 2015.

Moody's vice-president and banking analyst Frank Mirenzi predicted higher levels of arrears in the coming year as bad debts normalised in response to out-of-cycle rate rises from the banks.


"We expect to see a rising number of mortgage arrears in 2017," he said. "They are ticking up across the country. When we look at 30-day arrears in NSW pools we are seeing an uptick in these areas and also Victoria. These are supposed to be stronger parts of the economy."

Mr Jain said if household debt and prices continued to rise, then the risk of a property correction would rise significantly and that rising risks sometimes became a self-fulfilling prophecy.

"All of a sudden, everybody is thinking about the downside scenario" Mr Jain said.

He also said the loss of the country's AAA rating would lead his agency to downgrade the banks' credit ratings from AA.

S & P was careful not to buy into the language of booms and busts, noting that the fundamentals were more complex than a two-speed market.

"In terms of the recent discussion about the housing market, similar to what Wayne [Byres] has said, we try to stay away from the word bubble. We think bubble has very binary implications and suggests something is about to burst," Mr Jain said.

Moody's Mr Mirenzi said moves by the banking regulator to slow the rate of lending to property investors in 2014 had not had the desired impact. But he argued this was better than clamping down too hard on the sector.

"The fact that they have come out and announced more measures suggests they haven't worked as well. But when you introduce new measures, you want to undershoot," he said.


Mr Mirenzi pointed to the New Zealand experience, where targeting one part of the market saw activity squeezed into other areas. He said although he did not anticipate a correction "what we might see ultimately is losses in banks [loan] books".

The B word

CLSA veteran banking analyst Brian Johnson agreed that house prices were looking expensive.

"At the moment, it certainly does look bubblish. You aren't allowed to say bubble. But it certainly does look bubblish," he said.

Fidelity portfolio manager Kate Howitt said the government needed to make property less attractive for investors, especially if it takes speculators.

"It's that [speculative] element that is dangerous, rather than the price increases per se," she said.

Mr Morrison said the government and regulators were in a "watch" phase, but regulators were prepared to take further action if necessary.

"The next step is a matter of watch and monitor and take whatever next steps are necessary," he said. "I don't really want to pre-empt that; that is fundamentally a role for the regulators."

It was better to use a "scalpel than a chainsaw" when it came to the housing market, Mr Morrison added.

"Abolishing negative gearing or other rather heavy-handed measures that have been proposed by some, if you want to realise a housing shock then get out the chainsaw," he said.

"I think we have to continue to take a calibrated approach, a very careful and measured and proportionate approach, and whether that requires policy responses, ultimately that's a matter of judgment for the government. In the meantime, our policy approach has been to back up the regulator in making these judgments."