would reinforce the price overshoot ; it would likely reverse the recent improvement of household debt relative to income ; and it would add a further layer of risk to the banking system. from a reserve bank monetary policy perspective, if the house price and credit expansion begin to fuel excessive consumption spending and inflationary pressures, a monetary policy response would become more likely. the reserve bank ’ s flat interest rate outlook in our recent monetary policy statement would need to be revisited. in the financial policy area we are currently consulting on a potential increase in bank capital requirements against high lvr lending. we also expect to soon have in place a macroprudential policy framework that could be used to increase resilience in the banking system against a future housing downturn while having a moderating influence on credit expansion http : / / www. demographia. com / dhi. pdf http : / / www. imf. org / external / np / ms / 2013 / 031813b. htm http : / / www. treasury. govt. nz / publications / informationreleases / housing / pdfs / ha - 202689. pdf http : / / motu - www. motu. org. nz / wpapers / 13 _ 02. pdf bis central bankers ’ speeches to the housing sector. 7 macro - prudential policy is primarily aimed at enhancing financial stability, but it may also contribute to achieving monetary policy objectives. it is not seen as a replacement for monetary policy and it is not expected to be as powerful a tool as monetary policy. macro - prudential policy could nevertheless have a stabilising impact on credit supply decisions by the banks as well as credit demand decisions by households. conclusion i have talked about the importance of housing to new zealanders, certainly from an economic and financial perspective, and also from an emotional perspective. this often makes housing a major force behind economic and financial cycles, and a very relevant factor in the reserve bank ’ s monetary and financial policy considerations. current housing market pressures are centred in christchurch and auckland where significant supply shortages are apparent, for quite different reasons. in christchurch the imbalance is being addressed through a major four to six year rebuilding programme, funded largely by government and the insurance sector. in auckland the housing imbalance is more complex and uncertain. there are clearly supply constraints and high costs of development that need to be worked on over the medium - to long - term. however, there are also escalating

rbnz. govt. nz / monpol / about / 2452274. pdfhttp : / / www. productivity. govt. nz / sites / default / files / final percent20housing percent20affordability percent20report _ 0 _ 0. pdf bis central bankers ’ speeches rental yields of 4. 5 percent per year. added to this, credit has become easier to obtain, with banks competing aggressively to gain or protect their mortgage market shares. an increasing proportion of new mortgage lending is going out at high loan - to - value ( lvr ) ratios : now around 30 percent of new lending is at lvrs over 80 percent, compared to around 25 percent of lending in late 2011 - early 2012. annual growth in housing credit is just over 4 percent and has been running at higher rates over recent months. easy credit conditions, combined with the upward trend in house prices, are strengthening the incentive for renters to become first - home buyers and for existing owner - occupiers to upgrade. with new construction still at a slow pace, this excess housing demand increases house price pressures. movements in rents tend to support this interpretation. compared to christchurch, average rents in auckland have been growing at a more moderate annual rate of 4 to 5 percent, although still somewhat stronger than for the rest of the country ( figure 4 ). this suggests that the physical housing shortage in auckland is less acute than in christchurch and that credit factors have been an important driver of escalating house prices in auckland. figure 4 : inflation in rents by region ( annual average percent change ) source : department of building and housing reserve bank policy perspective as mentioned earlier, the reserve bank views housing from a monetary policy perspective and from a financial stability perspective. considering monetary policy first, the key question for us is whether the housing market buoyancy will lead to wider inflationary pressures. an important factor in this regard is whether we begin to see a reversal of the trend increase in the household savings rate that has occurred over recent years. this general deleveraging process, where many households have reduced debt and sold up investment properties, has moderated household demand in recent years and reduced the official interest rate settings needed to keep inflation pressures in check. our projections in the march monetary policy statement suggest that household spending will generally pick up in line with stronger incomes. we assume that the boost to spending arising from perceived increases in housing wealth will not be pronounced and that housing market activity does not encourage a