##financed domestic assets that could revert to foreign residents with the unwinding of these estates will amount to 25 % of gdp ( see figure 12 ). when considering the complication that this creates for iceland, you should bear in mind that it is partly because the resolution of the third - largest bankruptcy in the history of mankind is taking place in one of the smallest countries in europe. therefore, potential outflows amounting to 40 % of gdp might seek a speedy exit if we were to lift the capital controls tomorrow. if our relatively large fx reserves ( 30 % of gdp ) were our first line of defence, they would be wiped out completely, and then the exchange rate would give way, with potentially serious consequences for economic and financial stability in iceland. we are currently working hard on solutions to this problem, and such solutions do exist. from a logical standpoint, the solution must take the form of either a significant reduction before early exit or a secure longer - term holding period before the controls are lifted. i am coming towards the end of my talk and will have to leave discussion of the lessons learned for the q & a session. the list is long and includes the need to avoid policy conflicts in small, open, and financially integrated economies, to better regulate fx risk in domestic banking systems, to give up the dream of financial centres in small countries if they do not have access to credible and comprehensive international or regional safety nets, and to improve policy frameworks and tools in light of the experience that we have been through. in iceland, this process has gone past the talking stage : frameworks for monetary and financial stability policies have been improved, new prudential rules have been introduced, financial sector legislation has been amended, and supervision has been improved and strengthened. and there is more to come. thank you very much. bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches

lending. consequently, housing is a major source of value and of risk to the household sector and the banking system. the reserve bank focuses on the housing market for three main reasons. first, housing and the construction sector can be a source of inflationary pressure if construction costs and rents increase and the “ wealth effects ” of rising house prices feed through into additional spending or borrowing to finance consumer goods. second, the possibility of a significant fall in house prices can have important implications for financial stability and on the ability and willingness of banks to lend to support a recovery. finally, declining house prices can have significant impacts on output and employment, especially when the associated de - leveraging of household and corporate balance sheets continues for several years. at present, rising construction costs are not a major concern for monetary policy. construction costs in christchurch are up 12 percent over the past year and they have recently been rising in auckland. changes in relative prices are needed to attract additional workers and resources into the construction sector, but the reserve bank will continue assessing the risk of any spill - over of these prices into more generalised inflationary pressures. bis central bankers ’ speeches our main concern is the rate at which house prices are increasing and the potential risks this poses to the financial system and the broader economy. rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future. this is particularly the case in a market that is already widely considered to be over - valued. the reserve bank is not alone in expressing these concerns. over the past several months the imf, oecd, and the three major international rating agencies have pointed to the economic and financial stability risks associated with new zealand ’ s inflated housing market. in april this year, the imf suggested that new zealand house prices were over - valued by around 25 percent, and the oecd has expressed similar views4. figure 2 : house price to income across oecd countries ( deviations from historical average ) source : oecd house prices increased by 16 percent and 10 percent respectively in auckland and christchurch over the past year ( three - month moving average to july 2013 over the same period in 2012 ). they increased by 4 percent over the rest of new zealand overall, with considerable variability among regions. house prices are high by international standards when compared to household disposable income and rents. household debt, at 145 percent of household income, is also high and, despite dipping during the recession