some time focused on the buoyancy in parts of the property market and the leverage associated with that. much of the focus has been on residential property, and i will start with that before turning to the commercial sector, where risks have also been growing. while the housing market has not been universally strong around the country, we have been seeing significant strength in the sydney and melbourne markets in recent times, with investors playing a large role. to summarise a few key facts : • housing prices in sydney have increased by 31 per cent over the past two years, and reached an annual rate of increase of almost 20 per cent earlier this year. • melbourne prices were up by 16 per cent over the year to september this year. • the value of loan approvals to investors in new south wales approximately doubled over the two years to mid - 2015. bis central bankers ’ speeches as a result of these developments, the household debt ratio has started to edge up again from a level that was already high, at around 1½ times annual income ( graph 3 ). graph 3 click to view larger it is against this background that the reserve bank has highlighted the need for prudence, and has supported apra and asic in the measures that they have taken to strengthen lending standards. as a general proposition, mortgage lending standards in the post - crisis period have been relatively tight, at least more so than before the crisis. low - doc loans are rare, genuine savings are required to fund at least part of the deposit, and the application of interest rate buffers in serviceability assessments has become common. nonetheless, investigations by apra and asic have shown that there was some slipping in lending standards and that they were inadequate in some important respects to the current risk environment. specifically, apra found that, in some instances, lenders ’ serviceability assessments were based on over - optimistic judgments about the reliability of borrowers ’ incomes, or inadequate estimates of borrowers ’ living expenses, or that they failed to take into account the possible effect of future interest rate movements on a borrower ’ s existing commitments. asic ’ s review of interest - only lending practices made similar findings, and also noted instances where the lender did not make reasonable inquiries as to whether the loan product was suitable to the borrowers ’ circumstances. further to those findings, as a result of the additional scrutiny over the past year and substantial data revisions made by the banks, we now know that the level of investor activity in the

the possibility of workouts explicit ) may cause lenders to focus on the possibility of loss, but wouldn ’ t that help the moral hazard problems? if more carefully designed and rigorously enforced prudential controls inhibit some short - term flows, would there be any great loss in that? clearly, part of the capital surge of the 1990s could, with benefit, have been done without. is the problem – like advertising – that you do not know which part to stop? no. we can see elements – short - term rootless flows – which had minimum benefits and greatest costs. a case can be made that it would have been no great loss if the asian countries had received only the foreign direct investment flow. while it is technically true that “ speed doesn ’ t kill – it ’ s the stopping ”, we should recall that the problems come from excessive inflows, so if the net result of more rigorous “ rules of the game ” is smaller inflows in the boom times, then that will be a plus. if something has to give way in the “ open economy trilemma ” ( obstfeld and taylor 1997 ), then some limits on the variance of capital flow seem a good place to start. the third – and most controversial – set of possibilities are those which smack of capital controls. even here, the debate has shifted. now, chilean - type controls seem to be acceptable to international opinion. what distinguishes these? they are market - based, upfront and ex ante, and are on inflows rather than outflows. this is all still a lively topic of debate. the consensus view is changing, but slowly. while now acknowledging that temporary controls may be required in certain circumstances, the international consensus has a rather disparaging tone. just as “ real men don ’ t eat quiche ”, real countries don ’ t resort to capital controls. if such short - term capital controls are a legitimate instrument of policy, we need to define more clearly the circumstances, and be readier to endorse their use in these conditions. the alternative to implementing these ideas is inaction – either in the hope that these problems will go away or because of some ideological position based on the preservation of market purity. this risks losing the very real benefits of capital flows, if it leads to ill - designed measures by emerging countries to isolate themselves from these problems. at the same time, the crisis tarnishes the complex international trading structure, and adds