the more widely quoted standard share price index. the difference comes from the fact that the australian listed company sector has maintained a dividend yield of around 4. 5 per cent, on average, since 2007. bis central bankers ’ speeches about future returns. that ’ s what we need if we are to experience a long and sustainable expansion in housing investment that houses our growing population at acceptable cost, and pays reasonable returns on the capital deployed. that ’ s the sort of outcome we want, as part of the more balanced growth path for the economy we are seeking over the years ahead. another part of the balanced growth path would involve an expansion in some of the tradeexposed sectors that have been squeezed by the high exchange rate. the foreign exchange market is perhaps another area in which investors should take care. while the direction of the exchange rate ’ s response to some recent events might be understandable, that was from levels that were already unusually high. these levels of the exchange rate are not supported by australia ’ s relative levels of costs and productivity. moreover, the terms of trade are likely to fall, not rise, from here. so it seems quite likely that at some point in the future the australian dollar will be materially lower than it is today. the high exchange rate has also had a significant impact on the reserve bank ’ s own balance sheet. it led to a decline in the value of the bank ’ s foreign assets and hence a diminution in the bank ’ s capital, to a level well below that judged by the reserve bank board to be prudent. this has been a topic of some interest of late. our annual reports have made quite clear over several years now that, while this rundown in capital in the face of a very large valuation loss was exactly what such reserves were designed for, we considered it prudent to rebuild the capital at the earliest opportunity. it has been clear that the bank saw a strong case not to pay a dividend to the commonwealth during this period, preferring instead to retain earnings, so far as possible, to increase the bank ’ s capital. that rebuilding could in fact have taken quite a few years, given the low level of earnings. that is the background to the recent decision by the treasurer to act to strengthen the bank ’ s balance sheet, in accordance with a commitment he made prior to the election. the effect of this is that instead of it taking many years to rebuild the capital, it will occur in the current year

past year, the stock market, as measured by the asx 200 accumulation index, has returned about 25 per cent. 1 the median price of a dwelling in australia has risen by about 8 per cent over the past 18 months, reversing a previous decline. overall, the net worth of australians has increased by around 15 per cent, or more than $ 800 billion, since the end of 2011. it is not yet clear to what extent, or when, these more favourable trends in “ confidence ” will translate into intentions to spend, invest and employ. the pace of new dwelling construction is starting to respond to higher prices in the established property market, as we need it to. but at this stage, the available information suggests that broader investment intentions in the business community remain subdued. it may be a while yet before we can expect to see conclusive evidence of a change here. in the interim, some commentators have taken the view that the property market dynamics are worrying. my own view, thus far, has been that some rise in housing prices is part of the normal cyclical dynamic, that it improves the incentive to build, and that a price rise reversing an earlier decline probably isn ’ t something to complain about too quickly. moreover, credit growth, at between 4 and 5 per cent per annum to households, and less than that for business, does not suggest that rising leverage is so far feeding the price rise. hence it has been a little too early to signal great concern. there are, however, two caveats. the first is that, notwithstanding the above comment, credit growth may pick up somewhat over the period ahead. so this is an area to which we will, naturally, pay close attention. secondly, while overall credit growth remains low at present, borrowing is increasing quite quickly in some pockets. investor participation in housing in sydney, in particular, is becoming noticeably stronger. over the past year, the rate of finance approvals for this purpose has increased by 40 per cent. we have certainly experienced higher rates of growth of finance than that in the past, and it may be that we are seeing some catch - up from a delayed initial response to fundamentals favouring more investment in housing. nonetheless, as this activity continues, lenders and borrowers alike would be well advised to take due care. it is very important that strong lending standards remain in place, and that decisions be based on sensible assumptions this index, by the way, exceeds the 2007 peak, unlike