Housing starts had shock tumble in October Melbourne CBD...

• Housing starts had shock tumble in October
• Melbourne CBD oversupplied, overbuilding in Brisbane -CEO
• Bank concerned about wage growth stagnation
• Possible for ANZ to raise lending rates sooner than central bank

(Recasts on property market)

Australia and New Zealand Banking Group (ANZ) has become more cautious about lending to apartment developers and buyers due to concerns that parts of the market are oversupplied and household incomes have stagnated.

Shayne Elliott, CEO of Australia's third-largest bank by market value, told Reuters in an interview the bank had gone "quiet" in funding new developments in Melbourne's central business district and that there had been overbuilding in Brisbane.

"The second thing is to actually provide mortgages for people who are going to buy those apartments... again we haven't really been aggressive in that sector," he said.

Approvals to build new Australian homes sank a shocking 12.6 percent in October from a month earlier, confounding forecasts of a 1.5 percent rise and marking the biggest drop since mid-2012.

Asked about overall market conditions, Elliott said: "It doesn't mean it's a calamity or a disaster but it does mean we should be cautious."

He said it wasn't clear if a potential decline in values for small inner-city units being built in Sydney, Melbourne and Brisbane and often favoured by foreign buyers would have a contagion effect on other sections of the market.

ANZ could cope with property price falls of up to 40 percent and a near-doubling of unemployment - the worst case scenario it runs as part of its stress-testing.

"It doesn't mean profitability would stay but in terms of soundness and survival, capital ratios, the ability to lend look okay," he said, adding that ANZ's mortgage portfolio had an average loan-to-value ratio of 52 percent.

Elliott also said he was concerned that wage growth in Australia had stagnated, with household income falling in some parts of the country.

At a Reuters Newsmaker event earlier in the day, he cited the example of a Western Australian worker who was paid A$200,000 ($149,500) a year during the resources boom but had his wages cut to A$80,000 after the rout in commodity prices.

Elliott said that sort of experience, along with a trend towards more part-time work, had led ANZ to be increasingly cautious about lending.

That caution was echoed by Bank of Queensland (BOQ) Chairman Roger Davis who told an annual general meeting on Wednesday the bank was "cautious about increasing household debt, housing affordability and serviceability, growing under-employment and declining participation in the labour market."

Elliott added that Australia's financial regulator also required banks to stress test mortgages for a 3.25 percent rise in interest rates.

He said he would not rule out the possibility of his bank raising mortgage rates in a move that was out of step with the central bank cycle, as had sometimes occurred in the past. "It is absolutely reasonable to expect that," he said.

But he played down the prospect of ANZ needing to raise equity next year as a result of any regulatory changes that might require it to hold more capital.

The bank's Tier 1 capital ratio stood at 9.61 percent as of Sept. 30. That rises to 9.8 percent when the planned sale Asian retail and wealth banking assets to Singapore's DBS Group is included.

ANZ has placed several other assets up for sale, including its A$4.5 billion wealth and insurance business and minority stakes in four Asian banks, in a move that could release further capital, Elliott said. ($1 = 1.3378 Australian dollars)