who are both prudent and who are prepared to take risk. as lenders recalibrated their risk controls last year, the balance may have moved too far in some cases. this meant that credit conditions tightened more than was probably required. now, as lenders continue to seek the right balance, we need to remember that it is important that banks are prepared to take credit risk. and it's important that they have the capacity to manage that risk well. if they can't do this, then the economy will suffer. impact on the macroeconomy this brings me to the issue of how developments in the housing market affect the broader economy. movements in housing prices affect the economy through multiple channels. they influence consumer spending, including through the spending that occurs when people move homes. they also influence the amount of building activity that takes place. changes in housing prices also have an impact on access to finance by small business by affecting the value of collateral for loans. and finally, they can affect the profitability of our financial institutions. today, i would like to focus on the effect of housing prices on household consumption. my colleagues at the rba have examined how changes in measured housing wealth affect household spending. [ 1 ] they estimate that a 10 per cent increase in net housing wealth raises the level of consumption by around ¾ per cent in the short run and by 1½ per cent in the longer run. they have also examined how this wealth effect differs by type of spending. they find that it is highest for spending on motor vehicles and household furnishings and that for many other types of spending the effect is not significantly different from zero ( graph 11 ). part of the effect on spending on furnishings is likely to come from the fact that periods of rising housing prices are often associated with higher housing turnover, and turnover generates extra spending. https : / / www. rba. gov. au / speeches / 2019 / sp - gov - 2019 - 03 - 06. html 12 / 18 3 / 7 / 2019 the housing market and the economy | speeches | rba graph 11 over recent years, spending by households has risen at a faster rate than household income ; in other words, the saving rate has declined ( graph 12 ). the results that i just spoke about suggest that rising housing wealth played a role here. if so, falling housing prices, and a decline in measured household wealth, could have the opposite effect. https : / / www. rba. gov. au

www. rba. gov. au / speeches / 2019 / sp - gov - 2019 - 03 - 06. html 10 / 18 3 / 7 / 2019 the housing market and the economy | speeches | rba graph 10 it is clear there has been a progressive tightening in lending standards over recent years. the rba's liaison suggests that, on average, the maximum loan size offered to new borrowers has fallen by around 20 per cent since 2015. this reflects a combination of factors, including more accurate reporting of expenses, larger discounts applied to certain types of income and more comprehensive reporting of other liabilities. even so, only around 10 per cent of people borrow the maximum they are offered. sensibly, most people borrow less than what they are offered, so the effect of this reduction in borrowing capacity has not been particularly large. it has also been apparent through our liaison that some lenders became more cautious last year. there was a heightened concern by some loan officers about the consequences to them and their career prospects of making a loan that might not be repaid if the borrower's circumstances changed. so, lenders became more risk averse. this, along with greater verification of expenses and income, led to an increase in average loan approval times, although some lenders have invested in people and technology to address this. our liaison suggests that application approval rates are largely unchanged. overall, the evidence is that a tightening in credit supply has contributed to the slowdown in credit growth. the main story, though, is one of reduced demand for credit, rather than reduced supply. when housing prices are falling, investors are less likely to enter the market and to borrow. so too are owner - occupiers for a while. consistent with this, the number of loan applicants has declined https : / / www. rba. gov. au / speeches / 2019 / sp - gov - 2019 - 03 - 06. html 11 / 18 3 / 7 / 2019 the housing market and the economy | speeches | rba over the past year. there is also strong competition for borrowers with low credit risk, which is not something you would expect to see if it were mainly a supply story. this competition is evident in the significant discounts on interest rates on new loans compared with those on outstanding loans. even though the slowing in credit growth is largely a demand story, we are watching credit availability closely. it is perhaps stating the obvious to say that we want lenders