The last thing Commonwealth Bank shareholders need is Ian Narev talking up the risks of a property market crash. When your dividend cheque depends on a buoyant market for home loans, why scare the horses? Following the money usually leads to the most likely explanation in such matters.

The Reserve Bank has no such excuse, which is why its recent call to protect the banks from more competition because the RBA is worried about house prices is altogether more perplexing.

The Commonwealth claims there is no boom, implying shareholders can expect the current benevolent conditions and handsome profits to continue. The RBA says there is a boom, which is why banks should be shielded from competitive pressures so the handsome profits can continue.

Reconciling these positions is a bit like following the steps on an Escher drawing – only by stepping down do you get to the top floor, which you realise isn't the top at all once you get there.

It's confusing alright but don't let that stop you from trying to unravel the mystery. There's lots of money at stake so it's worth the effort.

The banks have been great investments over the past few decades, almost too good in fact. Their performance has left many investors overweight to the sector and forgetful of the damage debt can do, especially to a bank.

Before the global financial crisis many bank CEOs were asked about the quality of their loan books. Not one said lending standards had declined. Instead, words like 'prudent' and 'cautious' were thrown around, soothing the punters just before their bank stocks crashed and burned.

Between 2007 and 2009, the share prices of major British, American, Irish and Icelandic banks fell by more than 90 per cent before nationalisation.

When Narev dismissed concerns about a housing bubble he was just following this age-old script.

A bank CEO, especially one where mortgages make up 54 per cent of the company's assets, is almost the last person to ask for an even-handed assessment of the property market.

That doesn't mean there is a housing bubble, only that you can't rely on bankers to tell you there is.

The Reserve Bank is less conflicted. If it's concerned by the prospect of a property price bubble, bank shareholders should take note. And it is.

The odd thing is how the RBA proposes to address it.

In a perfect world, wherever that is, banks would be small enough to fail without undermining the entire system. Australia, where the big four control 80 per cent of the mortgage market, is about as far from that point as it's possible to get.

That's a bit of a problem for the authorities.

To address it they could simply force the banks to divest some of their assets, similar to the creation of the Baby Bells in the US telecommunications sector in 1982, creating lots of little banks instead of four big ones.

That's almost unimaginable. Fresh from their victory over the government in seeing off reforms to the financial planning industry, the banks wouldn't stand for it and nor would their millions of shareholders. Strike one.

The slow burn option would be to encourage more competition to get the market share of the big banks down. A level playing field where the big four were required to maintain the same capital buffers as regional banks, which are severely disadvantaged under the current system, would help.

But the Reserve Bank doesn't like that option, either.

In its submission to the Murray inquiry, the RBA says that policies encouraging competition posed a "systemic risk" because they would increase the number and volume of home loans. Strike two.

The third option, placing limits on what the banks can lend, addresses these concerns. Through tools like loan-to-valuation (LVR) and loan serviceability limits, effective caps can be placed on bank lending.

Research on the RBA website covering 57 countries over three decades suggests these can be 'effective tools for stabilising housing prices and credit cycles'. Nevertheless, the big cheeses at the RBA, who have played a part in the property boom by keeping rates low, aren't convinced. Strike three.

It's all a little odd. The Reserve Bank is clearly worried about the housing boom and doesn't want more finance directed to the sector. But it isn't prepared to encourage competition nor limit loan growth through macro-prudential tools like LVR limits.

All that remains is for it to issue regular warnings to property investors about an overheating housing market, which so far appear to have gone unheeded. The RBA finds itself clearly pointing to the very real risk of an over-heating housing market without offering any clear solutions to it.

Fortunately, investors in bank stocks have another tool at their disposal.

By allocating no more than 20 per cent of your portfolio to big bank stocks the damage will be limited if the RBA's worst fears come true.

It may pain you to sell down your holdings after so many years of capital growth and juicy dividends, but 23 years of uninterrupted economic growth has blinded many investors to the threats about which the Reserve Bank is so concerned.

It might not have the wherewithal or tools to deal with these risks but shareholders do.

John Addis is editor of Intelligent Investor Share Advisor (AFSL 282288). He is not a shareholder in Commonwealth Bank.

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