Foreign flows fan property risks

The Reserve Bank of Australia pointed to a "search for yield behaviour underpin[ning] strong investor demand for commercial property assets, particularly from offshore investors," as a key financial risk.

This "continue[s] to drive prices higher and yields lower both in Australia", it said in its periodic Financial Stability Review.

Patterns of residential investment lending are still being closely watched.

"The heightened level of investor activity and borrowing could amplify the housing price cycle and increase the risk of significant price falls later," the RBA said.

"The growing prevalence of interest-only lending might also increase households' vulnerability, since borrowers can pay down their loans more slowly than required under conventional principal and interest loans."