though the availability of finance for commercial property development remains very tight. employment has grown strongly over the past year and the unemployment rate has fallen back to a range of 5 – 5½ per cent, which historically has indicated a degree of tightness in the labour market. other indicators, however, suggest that the overall labour market may not be as tight as suggested by the unemployment rate. the financial side of the economy remains subdued. household credit is growing at a moderate pace while business credit remains soft. that softness is largely in relation to large borrowers ; lending to small businesses has increased at an annual rate of about 5 per cent over the first nine months of 2010 ( graph 17 ). graph 17 we have spent a fair amount of time at the bank looking at the question of why business credit is so soft. it is clear that banks had tightened lending standards sharply following the onset of the global financial crisis, which no doubt contributed to the slowdown in business lending. this has been most acute in the area of commercial property, where there has been a sharp cutting back, particularly by foreign - owned banks. more recently, there are signs that banks are becoming more willing to lend, at least in areas other than commercial property, but demand for loans, in aggregate, is not very strong. it seems that the investment that is taking place in australia, particularly in the case of the mining sector, is largely being financed outside the banking sector, either from retained earnings, direct investment from overseas or capital market raisings. the exchange rate is also clearly having an impact on business conditions. it has risen to post - float highs recently, although the real effective exchange rate remains below the levels recorded in the resources boom of the early 1970s ( graph 18 ). graph 18 a rise in the exchange rate is a natural consequence of a resources boom and, at the aggregate level, is helpful in allowing the economy to adjust. nonetheless, some sectors of the economy are adversely affected. a notable example at present is the tourism industry, where there has been a sharp increase in the number of australians travelling abroad rather than taking holidays domestically. this is having a severe effect on traditional holiday destinations in queensland, areas which are also suffering from overbuilding in the pre - crisis years. given this double impact, it is not surprising that these areas are currently experiencing among the highest rates of unemployment in the country. the bank is monitoring developments in these areas closely. the outlook while there are differences between sectors and between regions, the

. the reinterpretation of the evidence is that the link between housing wealth and spending arises not so much through the traditional pure wealth channel, but rather because higher housing prices are sometimes a proxy for faster expected income growth into the future. and it is this lift in expected income growth that spending is really responding to. interestingly, other colleagues at the rba have recently been examining this idea, again using household level data from the hilda survey. 13 they find clear evidence in favour of a collateral channel, especially for younger households who are more likely to be credit constrained. in contrast, they find no evidence in favour of the traditional pure wealth effect. instead, their evidence is consistent with the alternative expected - income idea. perhaps, the most intriguing aspect of their results is that when housing prices in a particular area increase, renters in that area increase their consumption. the increase is not as large as for owner occupiers, but it is an increase. the conclusion that my colleagues reach is that it is a common third factor such as higher expected future income, or less income uncertainty, that is, at least partly, responsible for the observed association between housing wealth and spending. if this conclusion is correct, then i think it helps partly explain what is going on in the economy at the moment. in the early 2000s, when housing prices and real incomes were rising quickly, many households used the higher value of their housing assets to increase their spending. nowadays, this is not happening on the same scale that it once was. with slower expected future income growth and increased concerns about future housing costs, the response to higher housing prices looks to be smaller than it was previously. and this smaller response is affecting overall spending in the economy. see, for example, dvornak and kohler ( 2007 ). recent work at the rba also suggest that higher housing wealth provides collateral for small - business borrowing and is associated with higher levels of business formation ( see connolly, la cava and read 2015 ). see windsor, jaaskela and finlay ( 2015 ). bis central bankers ’ speeches liabilities and risk the second issue that i wanted to touch on is the increase in debt that has accompanied the increase in land prices. throughout this talk i have barely touched on the liability side of the balance sheet. this is largely for the reason that i spoke about at the start, namely that financing transactions that are internal to the country do not change australia ’ s net wealth. however,