The household and business sectors have benefited from improved economic conditions, but higher interest rates have had a dampening effect on housing finance, the Reserve Bank of Australia says.
In its half-yearly Financial Stability Review, the RBA said while households had been more cautious in their borrowing behaviour than before the global financial crisis, demand for housing credit noticeably strengthened in 2009.
"The household and business sectors in Australia are benefiting from improved economic conditions," the RBA said on Thursday.
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"While households have generally been more cautious in their borrowing behaviour than in the pre-crisis period, their demand for housing credit strengthened noticeably during 2009, and this has been associated with stronger growth in housing prices.
"However, higher interest rates have had a dampening effect on housing finance."
The current cash rate is four per cent after the RBA raised it from 3.75 per cent in early March.
The bank took the cash rate 25 basis points higher three times between October and December, from a 49-year low of three per cent to 3.75 per cent.
In its FSR, the central bank said business credit had begun to stabilised after a period of de-leveraging (debt reduction) in response to the GFC.
The RBA noted this had been "partly induced by tighter credit conditions, but it also reflected efforts by businesses to strengthen their balance sheets by raising additional equity and reducing debt.
"There are signs that this de-leveraging process may now be drawing to a close, with business credit conditions having begun to stabilised over recent months and indications that credit supply conditions for the business sector are becoming less restrictive."
But the bank also warned that market sentiment in major advanced economies remained fragile, while in the Asian region risks are emerging over rapid credit growth and rising asset prices.
"Confidence in financial markets has recently been affected by concerns about sovereign credit risk, particularly in Europe.
"Nonetheless, over the past six months, risk pricing in financial markets has generally moderated, and bank funding conditions have improved.
"In China, credit growth in the year to February 2010 was above average at 27 per cent, though it has slowed in recent months."
