Wayne Byres, chairman of the prudential banking regulator, APRA, said household debt levels are now at the “higher end of the spectrum” due partly to high housing prices.
“Furthermore, after plateauing for much of the past decade, the household debt-to-income ratio has begun drifting upwards again,” he said.
“Households still have a significant and growing net worth, as housing assets are increasing in value faster than debt. Nevertheless, the trends in overall level of debt bear watching.”
Mr Byres said these debt levels have been manageable for households partly because interest rates are at record-low levels.
However, he warned that if rates return to anything like long-term averages, the interest burden would become quite high.
The “subdued income growth” that has become a feature of the economy will also make it harder to support significantly higher debt levels, he added.
Mr Byres also said that APRA has been worried that competition among lenders could produce a slow but steady erosion of credit quality.
One piece of good news Mr Byres offered is that banks appear to be reducing their investor lending, which is generally riskier than owner-occupied lending.
He also noted that high loan-to-value lending doesn't appear to be a cause for increasing concern.
“This declining trend in high-LVR lending has been evident most obviously in the case of owner-occupiers, but also applies to investors as well,” he said.