PHOTO: The Reserve Bank has flagged the thing that could trigger rising debt levels in Australia. (Source: Getty)

Looser lending standards could lead to “overexuberance” in Australia’s property market and trigger debt to rise, the Reserve Bank of Australia has warned on Friday.

Property prices, which have grown at breakneck speed in recent months, haven’t yet led to any major increase in debt – but this could become a risk in the future, the RBA said in its half-yearly Financial Stability Review released this morning.

As such, banks will need to keep lending standards on a tight leash.

“In an environment of accommodative financial conditions with rising asset prices it is particularly important that there is not excessive risk-taking by the financial sector,” it stated.

Higher risk-taking behaviour from lenders can take many forms, the RBA said, such as looser lending standards for individual loans or relaxing internal limits on the volume of risky loans they take on.

“Even if lenders do not weaken their own settings, increased risk-taking by optimistic borrowers could see a deterioration in the average quality of new lending,” the review said.

“This would weaken the resilience of businesses and households, and so the financial system, to future shocks.

“Increased risk-taking would fuel rising debt, from already high levels, increasing the debt-related risks to the economy and financial system from a fall in asset prices and borrowers’ income.”