example, in a recent international study of housing affordability, median new zealand house prices ( relative to disposable incomes ) were the third highest amongst comparable countries. 3 the more that house prices continue to overshoot their long - run sustainable levels, the greater the prospect of an eventual significant downward correction. we have seen in those countries most affected by the gfc the significant damage that can result from sharp declines in house prices, both in terms of financial system losses and the economic stresses placed on borrowers. the impact of such an adjustment could be worsened by existing economic headwinds in the form of an overvalued exchange rate, drought affected agriculture and the government ’ s significant fiscal consolidation. we are not the only ones concerned. this view of increasing housing risk in the new zealand financial system is shared by the international monetary fund in their recent “ article iv ” assessment4 and was voiced during the recent oecd mission to new zealand. it is also shared by moody ’ s and standard and poor ’ s in their most recent risk assessments of the new zealand banking system. what can be done to reduce the imbalances? an important medium - to long - term policy response is to work on alleviating the housing supply constraints, particularly in auckland. that means freeing up land for subdivisions and also reducing the time and cost barriers faced by developers. as recommended by the productivity commission, there is also a need to promote / facilitate productivity improvements in the building sector itself, in order to bring unit costs more into line with international norms. the government is working on measures to address many of these supply constraints, but we know it could take many years to correct the supply / demand imbalances through supply measures alone. 5 for example, recent motu research on a regional housing model for new zealand concludes : “ the over - arching conclusion across all simulations is that housing markets are very slow to adjust to disequilibria, such that exogenous shocks have very long lasting effects on prices and the housing stock. ” ( grimes et al, 2013 ) 6 in the short - to medium - term, we want to ensure that the banking system is adequately capitalised for the risks associated with mortgage lending and also avoid demand pressures that could exacerbate a house price overshoot that is in no - one ’ s best interest. a continued escalation of house prices would frustrate first - home buyers ; it would risk drawing more investors into the market which

alan bollard : kiwis like buying houses more than buying businesses talk by dr alan bollard, governor of the reserve bank of new zealand, to pricewaterhousecoopers annual tax conference, auckland, 9 november 2006. * * * introduction this talk looks at a very kiwi phenomenon : householder investors who prefer to put their savings into houses rather than a broad range of financial investments, especially equities. apart from having all their eggs in one basket, this also has implications for the level of gearing taken on by the household sector and the manner in which new zealand ’ s debt is funded. it has also meant that not much local equity is available for new zealand business. the gap has been filled by foreign equity, which brings many development advantages for large businesses, but which is less conducive to supporting startups and other small businesses. it has also left the economy more vulnerable. the reserve bank has the dual roles of promoting stability in prices and promoting stability in the financial system, to enhance economic performance. both these concerns drive this talk. 1 the bigger picture around financial stability will be updated when we release our latest financial stability report on 15 november 2006. household balance sheets in comparison with other comparable oecd countries, new zealand households hold a very large part of their assets in housing. the rates of owner - occupied housing are not particularly high in new zealand. rather what marks us out are a number of features : we hold relatively large holdings of second homes ( and associated durables like cars and boats ), usually under - utilised, and delivering low returns. in addition, over the last few years we have spent heavily on investor housing ( houses and apartments ), investments stimulated by expectations of exciting capital gains rather than exciting rental yields. this talk does not represent investment advice for the household sector. householders ’ needs and options differ and they should get professional advice for this. declaration of interest : my wife jenny morel runs a venture capital business, no 8 ventures limited. readers should note that there are limitations on the quality of data in this paper. the comparative statistics have been assembled from a range of sources and may be subject to inconsistencies. reserve bank estimates have been used where data have been unavailable from other sources. this exposure to housing is being financed by increased mortgage debt from the banking system. the average new zealand household ’ s debt has risen from around 100 percent of disposable income to around 170 percent over the