any opportunity for renegotiation of the deal, and if it were to collapse at the final stage, the banks would certainly be worse off. so far i have been concentrating on the position of the japanese banks. let me now review the more general state of banking in hong kong after the asian crisis. the first point to make is that the local hong kong banks have survived the crisis in good shape. although one or two banks lost money, most banks remained profitable and actually managed to improve their capital ratios during the period as their risk assets declined and their capital base expanded. no banks required financial assistance from the government during the crisis, in contrast to the situation in some of our asian neighbours where the cost to the public finances of bank rescues and restructuring could reach as much as us $ 100 billion. the rapid recovery in the hong kong economy is now helping to improve the banks ’ performance and to bring down bad debts. in the first half of this year, the pre - tax operating profits of the local banks from their hong kong operations rose in aggregate by more than 50 % over the same period of last year. admittedly, much of this was due to the reduction of 58 % in the bad debt charge, which will be a temporary factor in improving profitability. but even at the pre - provision level, profits grew by about 15 % compared with 1999. surprisingly, after the publicity about declining margins on mortgage lending, the growth in profits was helped by an increase in the overall net interest margin. this reflected the fact that funding costs remained low during the period. the position of the local hong kong banks is therefore looking better than at any time since the asian crisis. however, like the japanese banks, the banks here are also faced by a number of important challenges, albeit on a smaller scale than those in japan. foremost amongst these is increasing competition. this is being displayed most obviously in the decline in lending margins already mentioned, particularly on residential mortgage lending which is a major part of the loan portfolio of most of the local banks. the margin has recently reached a new low of 2. 25 % below prime compared with the pre - crisis level of 1. 25 % above prime. to some extent this reflects the temporary conditions of a depressed property sector, sluggish loan demand and plentiful liquidity. as loan demand picks up, as inevitably it will, the decline in margins will stabilise and may even reverse somewhat. but lending margins are unlikely to get back to where

of ample spare capacity. but such a situation would still provide support to aggregate demand in other ways, including via the operation of the balance - sheet and wealth channels. there is evidence of some tightening in supply in pockets of the country. in some cities, stocks of unsold lots suitable for development appear to be unusually low ( graph 3 ). shortages are most evident in sydney, where greenfield land releases have not kept pace with recent strong demand. also, some of the bank ’ s liaison contacts are concerned that the stock of suitable sites for apartment developments in sydney has been depleted in the past few years. there is little evidence of labour supply constraints outside a few trades and professional roles. however, inflation of building material prices has risen and the bank ’ s liaison suggests that some builders have increased margins over the past year or so. consistent with this, inflation in new dwelling costs has risen to be almost 2 percentage points above its average over the inflation - targeting period ; although, it is still below that seen when dwelling construction was strong in the early 2000s. despite the potential emergence of some constraints affecting the supply of new dwellings in pockets of the country, there appears to be scope for strong growth in new dwelling i ’ ve said quite a bit about the difficulty of modelling business investment. see kent c ( 2014 ), ‘ non - mining business investment – where to from here? ’, address to the bloomberg summit, sydney, 16 september. it is often difficult to find a significant empirical relationship between interest rates and business investment. for a discussion of how businesses respond to changes in interest rates see lane k and t rosewall ( 2015 ), ‘ firms ’ investment decisions and interest rates ’, rba bulletin, june, forthcoming. it appears that there might be a slightly longer delay between the time approvals are granted and the construction of housing than in the past. this is likely to reflect the larger share of higher - density dwellings, which take longer to complete than detached dwellings. for more information on this point, see rba ( 2015 ), ‘ box c : the cycle in dwelling investment ’, statement on monetary policy, may, pp 43 – 45. bis central bankers ’ speeches construction in other parts of the country. moreover, alterations and additions activity could pick up. this used to account for about 45 per cent of total dwelling construction, but has declined over the past few years, despite lower interest rates and the sizeable increase in dwelling prices. in short, there are some signs