The Reserve Bank of Australia says its biggest concern about a property price shock is not that banks may fail, but that it could cause a sharp drop in household spending.
RBA governor Philip Lowe says the nation's banks very are well capitalised and will be resilient to any big fall in property prices.
The real concern is about households with overstretched finances, which would respond to any price shocks by focusing on managing debt.
"This could prompt a sharp contraction in their spending, as they try to get their balance sheets back into better shape," Dr Lowe told a business lunch in Brisbane.
"An otherwise manageable downturn could be turned into something more serious."
Australian Bureau of Statistics data shows household consumption spending is significantly important for the economy.
One of the main contributors to a 1.1 per cent rebound in economic growth in the December quarter was a 0.9 per cent rise in household consumption expenditure.
The RBA governor also said high housing prices had mainly been driven by an unbalanced supply and demand ratio in major cities, rather than a rise in the number and proportion of loans to investors.
"This borrowing is not the underlying cause of the higher housing prices," Dr Lowe said.
"But the borrowing has added to the upward pressure on prices caused by the underlying supply-demand dynamics."
Dr Lowe said the central bank also expects demand and supply to be better balanced over time, due to an increased rate of home-building, more investment in infrastructure in cities, and an eventual rise in interest rates.
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