An official of the Reserve Bank of Australia (RBA) lauded the high-quality lending practices of the country's banks which helped avoid a subprime housing slump similar to what happened in the U.S.

Luci Ellis, RBA head of financial stability, told the Australian Mortgage Conference on Thursday that the main cause of the U.S. housing decline was lax lending practices which were eased far beyond what was seen in other nations during the housing boom period.

Ms Ellis attributed the development to some subprime lenders gaining more market share and individual lenders lowering their benchmarks.

In contrast, even at its peak, subprime lending in Australia was only a small fraction of the total and low documentation loans were also a small niche. She pointed out that zero deposit loans or 125 per cent loans available in the U.K. were not available in Australia.

Me Eliisa said two third of new mortgage borrowers from banks in Australia had an initial loan-to-valuation ratio below 80 per cent, which is the result of stricter oversight of lenders. The Australian Prudential Regulation Authority had supervision over mortgage lenders while those outside its supervision were regulated by consumer protection benchmarks.

She also pointed out that most of Australian mortgage borrowers pay down their balances faster than the contract requirements. Ms Ellis encouraged lenders not to yield to the temptation of lowering lending benchmarks to build the weak housing market.

"It must be hard to resist the disappointed customers who just want to borrow that bit extra to purchase their dream home, especially when the loan officer is also trying to make budget on new loan approvals," she said.

The RBA official said that because of the slower growth in property prices compared to incomes, housing prices would continue to fall amid soft periods in the market. According to an index that measured the weighted average prices for established homes in eight major Australian cities, prices declined 4.8 per cent in 2011 from 2010. It is the largest calendar year drop since 2002.

Since housing lending comprises a bigger portion of the balance sheets of Australian lenders compared to American banks, if a U.S.-style housing bust would occur, it would cause damage to financial stability in Australia, Ms Ellis added.

She did not address monetary policy which has become controversial following the Feb 7 decision by the RBA to retain the overnight cash rate to 4.25 per cent while the big four raised their interest rates by 6 to 10 basis points. The banks cited rising cost of funding from overseas as the reason behind their decision, which an analyst from French bank, Societe Generale, doubted.

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