strength in demand for resources has kept australian exports expanding. australia ’ s terms of trade, even though well off their peak, remain high by historical standards. confidence about the future for the resources sector is building quite strongly. finally, australia had ample scope for macroeconomic policy action to support demand as global economic conditions rapidly deteriorated, and that scope was used. the commonwealth budget was in surplus and there was no debt, which meant expansionary fiscal policy measures could be afforded. in addition, monetary policy could be eased significantly, without taking interest rates to zero or engaging in the highly unconventional policies that have been necessary in some other countries. i have maintained throughout that australia ’ s medium - term prospects remained good and that we should not lose confidence. more people seem to be taking that same view. measures of business and household confidence have shown a very substantial pick - up from the low points reached earlier this year. share prices have risen by almost half. house prices have risen rather than fallen, though commercial property prices have fallen. people are realising that, though things have been tough, the worst has not occurred and the future is looking brighter. earlier plans for drastic cuts to capital spending look like they are being reconsidered. economic growth forecasts are being revised up. a straightforward reading of the economic outcomes would suggest that the various policy measures have been effective in supporting demand. in due course, both fiscal and monetary support will need to be unwound as private demand increases. in the case of the fiscal measures, this was built into their design. the peak effect of these measures on the rate of growth of demand has probably already passed. the extent of support will tend to tail off further over the next year. in the case of monetary policy, the bank has already signalled that interest rates can be expected, at some point, to move off their current unusually low levels, as recovery proceeds. these adjustments back towards more normal settings for both types of macroeconomic policy are what should be expected during the recovery phase of a business cycle. our most recently released set of forecasts assumes they occur. such an outcome would mean that fiscal and monetary policy would be acting broadly consistently, as they did when they were moved in the expansionary direction when the economy was slowing. in both cases a degree of policy discipline will be needed. policy frameworks will be valuable in enforcing that discipline. on the fiscal side, the forward estimates provide an indication of the restraint needed to move the budget back towards balance

it is the supply response that determines the extent to which additional demand results in higher prices over time. our submission highlights that australia faces a number of longstanding challenges in this area, including regulatory and zoning constraints, inherent geographical barriers and the cost structure of the building industry. there are also obstacles to affordable housing created by australia ’ s unusually low - density urban structure, though this is gradually changing. our submission does not seek to offer policy prescriptions for improving the supply - side response. the general point i would make is that we can ’ t improve housing affordability simply by adding to demand. targeted assistance can certainly help particular groups such as first home buyers, but without a supply - side response, any generalised increase in demand will just be capitalised into prices. hence an important emphasis in our submission is that due attention needs to be given to supply - side factors in any policy response to perceived problems of affordability. let me turn now to some current developments. i have already mentioned the recent strength in australian housing prices and i expect the committee will be interested in the bank ’ s current assessment of this, particularly in light of the comments made in our financial stability review last week. over the past couple of years, housing prices in australia have been rising strongly. some of this perhaps represented an element of “ catch up ” after some earlier weakness. nonetheless, prices have continued to rise significantly faster than incomes, and this has been associated with strong growth in investor activity. to cite a few key facts and figures : • national housing prices have been rising at a rate of around 10 per cent over the past year, and around 15 per cent in sydney. • the rate of growth of investor finance is significantly outpacing the growth in household incomes. • loans to investors currently account for close to 50 per cent of new housing loan approvals. • investor activity has been particularly concentrated in new south wales and victoria. in new south wales investor loan approvals have increased by about 90 per cent over the past two years. bis central bankers ’ speeches it is against this background that the bank said in its financial stability review last week that the composition of housing and mortgage market activity is becoming unbalanced. the review also indicated that we are discussing with apra steps that might be taken to reinforce sound lending practices, particularly for investor finance, though not necessarily limited to that. i want to emphasise that the banks in australia are resilient, and mortgage lending in this country has historically been relatively