cost of equity capital, and to the cost of debt as credit spreads widen. there may also be an increase in general uncertainty and preparedness to invest as a result of community disillusionment with some recent business practices. i want to stress that these risks come from international markets, not the domestic ones. even though australian share prices have fallen, compared with others they have done so by a smaller amount, from a much lower peak, and the fall has been much more recent. most importantly, we did not have a “ bubble ” in our stock market as diagram 1 attests. nor have we had anywhere near the widening of credit spreads in debt markets that has occurred in the united states ( diagram 2 ). our business environment has not been without incident, as several prominent failures show, but with the exception of one. tel, they have not been the result of a boom and bust in the share markets. as has canada, but it is a special case in that it followed us rates down to very low levels. it has since raised them three times this year, but they are still only at 2. 75 per cent. diagram 1 click to view larger diagram 2 click to view larger the other thing i would like to mention before i close is another aspect of asset prices. we in australia have been very fortunate in the current expansion in not having a boom or a bust in asset prices - the closest we come to such a situation would, i suppose, be the large rises that have occurred over the past five years in house prices. now, many of you may be aware that this situation is one that we at the reserve bank are not entirely comfortable with. while it may give home owners a happy feeling, we cannot help but also think of the people - mainly in the younger age groups - who aspire to own a home, but are finding it increasingly difficult to do so because rising prices are putting home ownership out of their reach. but since this is mainly a wealth distributional issue, rather than something that directly affects the economy ’ s ability to continue its low - inflation economic expansion, it is not something that can or should be directly this is not the first time the reserve bank has “ bought into ” this issue. see my speech, “ inflation and changing public attitudes “, reserve bank bulletin, december 1995, which made the same points during a period when there was some public dissatisfaction with the failure of house prices to rise! addressed by monetary policy. as always,

a range of alternative reserve assets, and the australian government maintaining its aaa credit rating, asset managers appear to have regarded the risk - return trade - off and diversification benefits associated with holding australian government debt increasingly favourably. but while the foreign ownership share of australian government debt remains historically high, the australian dollar share of global reserve holdings is modest at less than 2 per cent on average ( for those central banks for whom information on the currency denomination of their reserve assets is known ). my general sense is that the bulk of sovereign asset managers now have australian dollar assets as part of their portfolios, so there are not many new buyers left to emerge. the main chunk of diversification occurred through 2010 to 2012, although demand has remained robust since then. these changes in the composition of australia ’ s capital inflows have been reflected in changes in the composition of the stock of australia ’ s foreign assets and – most notably – in the composition of the stock of australia ’ s foreign liabilities ( graph 6 ). in particular, between december 2007 and december 2013, the banking sector ’ s gross foreign debt liabilities have fallen by the equivalent of around 10 percentage points of gdp to around 55 per cent. meanwhile, the public sector ’ s gross foreign debt liabilities have more than doubled as a share of gdp over this period ( and are currently equivalent to around 20 per cent of gdp ). the stock of private non - financial sector liabilities has increased by the equivalent of around 4 percentage points of gdp over this period to be currently equivalent to about 70 per cent of gdp. graph 6 bis central bankers ’ speeches these changes in the sectoral composition of australia ’ s foreign liabilities have occurred even though in overall magnitude, australia ’ s net liability position has been broadly unchanged at around 55 per cent of gdp since 2007 ( graph 7 ). there has also been an increase in the share of net long - term debt liabilities and a corresponding decline in the share of net short - term liabilities, consistent both with the lengthening in the average tenor of banks ’ debt liabilities and the shift from bank debt to public debt ( public debt has a longer average tenor than bank debt ). 7 graph 7 australia ’ s net equity liability position has declined slightly as a share of gdp since 2007 and, in the december quarter last year, switched to a ( small ) net asset position for the first time since the series began. that is, australians now own more equity investments offshore than foreigners ’ own