incentive for households to own rather than rent. over the past 18 months, as housing demand picked up, housing credit has also been easier to obtain than previously, with banks competing aggressively to write mortgages. as a consequence, credit growth has risen, with outstanding housing credit rising 6 percent through the year to august. lending to borrowers with high lvrs has grown twice as fast, causing the share of high lvr lending to rise ( figure 6 ). figure 6 : high - lvr loans as a share of new lending source : rbnz. households who borrow at high lvrs tend to be the most vulnerable to a fall in house prices. in the event that house prices fall, these borrowers are more likely to see the value of their house fall below the amount of debt they have outstanding – particularly if they have entered the market recently. this can lead to financial hardship, mortgage defaults and, potentially, stress across the broader financial system. apart from easy credit conditions, housing demand over the past year has been boosted by a growing net inflow of immigrants ( figure 7 ). net immigration to new zealand has risen substantially over 2013 due to fewer departures of new zealand citizens to australia at the same time as inflows of returning citizens and non - new zealand citizens from europe, the bis central bankers ’ speeches united kingdom and asia have continued to increase. over the year to august 2013, a net 13, 000 people moved to new zealand with the intent of staying a year or longer – the highest annual inflow since early 2010. as more people enter the country, this increases the demand for housing, tending to put upward pressure on rents and house prices – particularly in auckland, where immigration flows have been strongest. figure 7 : permanent and long - term immigration to new zealand ( quarterly ) source : statistics new zealand. the role of high - lvr lending restrictions the lvr lending restrictions in operation from 1 october 2013 are primarily intended to reduce systemic risk by slowing house price inflation. they seek to reduce the risk that a subsequent price correction in an increasingly overvalued housing market could pose for the financial sector and broader economy. given the relatively slow response of housing supply, it does not make sense to let credit - based housing demand get too far out in front. further, to the extent that the lvr restrictions dampen overall demand in the economy, they could also reduce the extent of interest rate increases, and hence exchange rate pressure, that may be

need to be 9 percent higher than at the height of the recent housing boom, even assuming no growth in home building through the rest of the country. at the same time, a significant amount of repair work, infrastructure and commercial construction will be taking place in canterbury. in reality, we expect the targeted house building in auckland and christchurch to occur over a longer period than three years. how much longer will depend on the extent of improvements in approval processes and on the ability of the construction industry to expand its current capacity. figure 5 : new dwellings consented in an unconstrained building scenario source : statistics new zealand, rbnz calculations. note : this scenario assumes that auckland accord targets are met, 12, 000 homes are built in canterbury over the next three years, and that building through the rest of new zealand continues at its current rate. while phasing of this major home building programme will help to limit resource pressures, some wage and price pressures will inevitably result. the upward pressure on construction costs that we are currently seeing in canterbury may well extend more broadly across the industry. on a moderate scale, this would help to attract resources into the construction industry and hence facilitate the building expansion. on an excessive scale, this would risk spilling over into general inflation and put upward pressure on interest rates and the exchange rate. to avoid the potential problems associated with excessive house price and construction cost inflation, we will need a more responsive supply side that includes : bis central bankers ’ speeches • a responsive and innovative building sector ; • an adequate supply of labour, some of which will need to be imported ; and • a responsive planning and consenting process. we will also need the demand side to be kept in check while the supply response takes place. the demand side and credit clearly, the supply of houses is an important determinant of house prices – but it is only one side of the story. we have seen the shortage of homes in auckland emerge due to low construction rates over many years. but house price inflation has accelerated only over the past two years, over the same period that credit conditions became easier and population growth picked up with stronger net inward migration. it is relevant that house price inflation in auckland has not been matched by rental inflation, which is less affected by credit conditions. looking more closely at credit conditions, interest rates are currently very low by historical standards. indeed, the sub - 5 percent mortgage rates on offer earlier in the year were the lowest since the 1960s. low interest rates increase the