been unusually high in recent years and it is not unreasonable to expect that it will decline over time. but this ratio can adjust in several ways : lower house prices, rising incomes or falling interest rates. in the us, falls in house prices have been a big part of the adjustment. i think there are reasons, however, to believe that the australian housing market will not follow the us market to the same degree. let me run through some of these reasons. first, the cycle in the australian housing market, rather than following the us market, is in fact at a more advanced stage ; it is probably leading the us market by three years or so. the australian housing market was at its hottest in 2003, whereas the us market peaked in 2006. to understand how this came about, it is necessary to look back to the second half of the 1990s. the tremendous shift in the global savings / investment balance that followed the asian crisis generated a surplus of funds in global markets. the financial sectors in the english - speaking countries, being more dynamic and responsive than in many other countries, were quick to take advantage of this. in the us, the early part of this period coincided with a surge in technological innovation, and the initial wave of money in that country went to the technology sector. this resulted in the “ tech ” bubble, which eventually collapsed in 2000. australia did not have much of a technology - producing sector so our financial institutions sought out other investment opportunities. what australia did have was a conservative household sector with relatively low gearing. as such, the financial sector saw opportunities for financial innovation aimed at encouraging households to make greater use of their borrowing capacity. most of this was focused on housing lending. the result was that the boom in housing in australia got underway well before that in the us the latter did not really get going until after the tech bubble collapsed. a second difference relates to the dynamics of the housing markets in the two countries. in the us, the rise in house prices elicited a very strong supply response so that, by the end of 2007, there was almost one - year ’ s supply of newly built unsold houses overhanging the market. us house prices stopped rising essentially because the supply of houses overtook demand. graph 5 here in australia the rise in house prices did not elicit such a strong supply response. there were pockets of overdevelopment in apartments in 2003 / 04 but, by and large, there was never a serious oversupply of

over the past few years as people switched their spending from services to goods. the result of impaired supply and strong demand has been higher prices around the world. important as these global factors have been, they are not the full story for why inflation is high in australia. demand here has been very strong relative to the ability of our economy to meet that demand. this is clearly evident in the labour market, where the number of job vacancies is at a record high and firms are finding it hard to hire workers. there are also capacity constraints in many sectors, including the building of infrastructure and the housing industry. this strong demand is, in part, a result of the policy approach during the pandemic. during 2020 and 2021, both fiscal and monetary policy provided very considerable economic support to households and businesses. at the rba, we did this to provide a financial bridge to the day when the virus was contained and to provide some insurance against the possibility of very bad economic outcomes. as we sit here in canberra today, it can be easy to forget how dire the outlook was in 2020 : there were credible projections that the unemployment rate would reach 15 per cent, spending was collapsing, our hospitals were expected to be overflowing and a vaccine seemed years away. it was a scary time. in that environment, the reserve bank board wanted to do what it could to help and to shore up confidence. we also were also seeking to provide some economic insurance against the worst possible outcomes. in the event, vaccines were developed in record time and our economy – with the support of monetary and fiscal policies – proved to be very resilient. we avoided the dire outcomes that many thought likely. and today, many people are returning back towards their pre - pandemic way of life and are spending again, including on travel and services. we saw further evidence of this last week in the national accounts, with the australian economy growing by 0. 9 per cent in the june quarter, and by 3. 6 per cent over the year. these are good outcomes, and they are better than those being recorded in most other countries. given the resilience of our economy and the surge in inflation, it is understandable that some people are questioning whether or not too much support was provided by the rba over the past two years. judgements on this will differ. but in those dark days of the pandemic, the reserve bank board judged that the bigger policy mistake would have been to do too