region was sourced from non - bank lenders. this may imply that a smaller proportion of the borrowers in the region met banks ’ lending guidelines and / or that some of those marketing the non - bank loans arranged loans that were inappropriate for some people. the arrears rate on loans from non - bank lenders in this part of sydney is running at three times that for loans on the major banks ’ balance sheets. that said, it is still only about 1. 5 per cent. this combination of outcomes created substantial financial pressures in this region after the housing boom ended in early 2004, as evidenced by the sharp rise in the arrears rate in the region over 2005 and 2006. having said that, the situation appears to have stabilised in the past year, most likely due to rising income levels. 4. the rental market the rental market is currently very tight right around australia : • vacancy rates are very low, at less than 1½ per cent on average across australia ( chart 12 ) ; and • rents are rising quickly. in the past year, newly negotiated rents rose by about 13 per cent, while all rents outstanding ( as measured in the cpi ) rose by about 7 per cent ( chart 13 ). why has this happened, and why isn ’ t more investment in rental housing taking place? to answer these questions, we need to look back to the start of the housing boom in the mid 1990s. at that point, commonly used measures of gross yields on rental properties were in the order of 5 - 6 per cent. over the subsequent decade, rents rose much less than dwelling prices, so that rental yields fell to relatively low levels – about 3 to 4 per cent ( chart 14 ). during this period, investment continued to flow into rental properties, as investors anticipated that capital gains would more than compensate for the low yield. however, once it became clear that dwelling prices may no longer keep rising, the rental yield by itself was not sufficiently attractive to sustain the rate of investment, and the vacancy rate started to fall. even though rents have been rising quickly recently, over the longer term the cost of renting has risen less than the cost of buying a home ( chart 15 ). the price signals are therefore pushing households towards renting. on the other hand, the price signals facing investors are not conducive to increasing the supply of rental properties, as yields remain low and the prospects of capital gains uncertain. it is hard to see how equilibrium can be restored

and eventual surplus over time, as required by the government ’ s medium - term fiscal commitment. on the monetary side, the inflation targeting framework the reserve bank has been following for a decade and a half will guide adjustments to interest rates. these will be timely and ahead of a build - up of imbalances that would occur if interest rates were kept low for too long. these frameworks will, in other words, prompt the needed adjustments. it was the preparedness to make those adjustments in the past, guided by these very frameworks, that contained the build - up of imbalances in the upswing and which in turn earned us the scope to take bold measures to support demand when a recession loomed. a continuation of that approach into the future will serve us well.