Australian household debt has increased and wage growth remains weak, but that's not yet led to a substantial pickup in financial stress. It was, however, a broadly positive statement, and one gets the sense that the RBA is becoming more confident in the Australian economy, particularly in comparison to the end of previous year.
"This suggests that the risks to financial institutions and financial stability more broadly from household mortgage stress are not particularly acute at the moment".
"As investors purchase more new dwellings than owner-occupiers, they might also exacerbate the housing construction cycle, making it prone to periods of oversupply and having a knock on effect to developers".
"While debt levels are relatively high, and there are owner-occupier households that are experiencing some financial stress, this group is not now growing rapidly", Ms Bullock concluded.
"They often have other assets, such as an owner-occupied home, and also earn rental income".
Conceding that it's the high-income taxpayers who are more likely to possess investment properties, and as such have a greater capacity to absorb income or interest rate stings, she said it's valuable to consider the risk of financial stress on these borrowers.
Despite a comparably better starting position, Bullock says the preference from investors to use interest-only loans could lead to a pickup in financial stress should property prices fall for a prolonged period.
"The more debt households have, the more sensitive their cash flow, and hence consumption, is likely to be to a rise in interest rates".
The RBA also noted a decline in housing credit, which it believes is attributable to the slowdown in lending to investors, and also observed an increase in non-bank lending.
Ms Bullock said the large proportion of interest-only loans set to expire between 2018 and 2022 was of particular concern.
"The bank expresses uncertainly over the future path of the participation rate, how much spare capacity exists in the labour market, how quickly any spare capacity might be eroded and how soon - and by how much - wages growth might pick up", she said.
"Some borrowers in this situation will simply move to principal and interest repayments as originally contracted".
"Indeed, the macro-financial risks are potentially heightened with investor lending".
"Lenders have been assessing borrowers' ability to service the loan at a minimum interest rate of at least 7%".
"There may, however, be some borrowers that do not meet current lending standards for extending their interest-only repayments but would find the step-up to principal and interest repayments hard to manage", Ms Bullock said.
"While we think this is a relatively small proportion of borrowers, it will be an area to watch".
JP Morgan chief economist Sally Auld said the RBA was unlikely to pull the trigger on interest rates until there was more certainty about the jobs market.
Ms Bullock noted while the measures taken by APRA and ASIC to strengthen mortgage lending standards have helped improve the quality of lending over the past couple of years, the impact of falling house prices remained a big uncertainty in terms of overall financial stability.