to 3 percent for the rest of the country ( figure 5 ). as a summary measure of excess demand, this points to the auckland housing shortage getting worse, not better. in addition, the volume of house sales is picking up in other areas such as waikato, bay of plenty and northland, and this could translate into growing price pressures in those markets. looking at key house price ratios suggests an increasing degree of stretch in auckland prices relative to sustainable levels. house price - to - income ratios have increased from around 6 to almost 9 in auckland since 2012, a level seen in some of the world ’ s most expensive cities – cities such as london, san francisco and sydney. for the rest of new these estimates are broadly in line with estimates produced by the auckland council and productivity commission. bis central bankers ’ speeches zealand, the average price - to - income ratio is about half auckland ’ s level ( figure 6 ). similarly, rental yields have fallen materially in auckland, and are currently at historic lows of below 3 percent. while low interest rates explain much of this downward trend, rental yields in the rest of new zealand have remained well above auckland yields ( figure 3 ). auckland is increasingly being seen as a regional ( asia - pacific ) centre, and this no doubt accounts for a part of the stretch in price - to - income ratios. however, good long - run fundamentals do not make auckland immune to a correction. international evidence shows that the further house price - to - income ratios deviate from historical norms, the greater the potential for a sharp and damaging correction. 4 in auckland ’ s case such a correction could be triggered by a range of domestic and external factors. the demand for housing would be reduced by a slowdown in the economy, which could result, for example, from continued weakness in export prices ; or a drop off in the net inflow of migrants. externally, if the current slowdown in china persists or accelerates then the flow of funds from that source could diminish. or we could see an increase in the risk premium in new zealand interest rates – either due to a global financial shock or due to a perceived increase in new zealand specific risk. indeed recently we saw an indication of this with standard and poor ’ s reducing the stand - alone rating of the new zealand banking system, citing heightened risk in auckland housing as their primary concern. 5 interest rates internationally are at historic lows and well below rates seen in recent decades prior

ahead of the formal commencement of the policy. second, banks noted that the proposed 2 percent speed limit for high lvr investor lending was insufficient to accommodate special circumstances such as extra lending required to provide assistance to borrowers in hardship. in response we are adopting a higher speed limit of 5 percent on high lvr investor lending. this will provide banks with more scope to manage the existing pipeline of pre - approved lending. based on our experience with the existing lvr speed limit, it is expected that the actual flow of high lvr lending to auckland investors will settle well below 5 percent as banks adopt a buffer to ensure compliance. third, in light of feedback from the consultation, we have decided to introduce a new exemption category for lending for significant remedial construction work, such as for houses with weather tightness issues or requiring seismic strengthening. it would be undesirable to prevent banks from providing this lending, from both a financial stability and a broader efficiency perspective. to date, high lvr lending for such remedial work has counted against the existing speed limit. in conjunction with the new lvr restrictions, and consistent with basel guidelines, the banks will be required to establish a new asset class for all loans to residential property investors. loans in this asset class will attract a higher risk weighting than owner occupied mortgages, requiring banks to hold more capital against them. for banks following the standardised approach to capital adequacy, the average risk weight for investor loans will increase by about 6 percentage points. for the larger banks, that will be developing new internal risk models, our expectation is that average risk weights on investor mortgages will increase by a similar amount. bis central bankers ’ speeches conclusion the resurgence in auckland house prices over the past year has made the reserve bank increasingly concerned about the risks to financial stability. it is certainly on our “ what keeps us awake at night ” list. auckland prices have risen a further 24 percent over the past year, stretching the price - toincome ratio for the region to 9. this is double the ratio for the rest of new zealand and places auckland among the world ’ s most expensive cities. new housing supply has been growing but nowhere near fast enough to make a dent in the existing housing shortage. in the meantime, net migration is at record levels and investors continue to expand their influence in the auckland market. the increasing investor presence, now accounting for 41 percent of auckland house purchases, has been supported by rapid growth in new lending