Return to riskier mortgage lending a dangerous game

While banks tightened their lending standards for residential borrowers during the financial crisis, there have been signs of an easing in recent months, with some banks prepared to offer housing loans at relatively high loan-to-value ratios, the Reserve Bank's six-monthly stability report says.

The bank is worried the increased risk to both banks and borrowers with higher LVRs will dampen the growth seen in both the housing market and economy as a whole.

House prices are historically still extremely high, pushed up over recent months as a result of a shortage of listings and increased demand.

"The housing market is currently strengthening, but we believe house price growth will slow after the current recovery phase," the bank said. "Continued weakness in the labour market, along with falling agricultural incomes, could also weigh on the housing market.