Housing has "genuinely become more important to central banks", said Luci Ellis, head of the Reserve Bank's financial stability department, addressing the CITI Residential Housing Conference in Sydney yesterday.House prices and housing-related debt have increased relative to the rest of the economy, while housing-related lending is a large proportion of bank lending. Ellis noted that in Australian and New Zealand cities, which still follow 19 century models for cities, higher-value activity and population density occur closer to the centre. "Land prices and rents are lower, the further from the centre you go," she said. This structure has kept a lid on house prices, although many of these choices are also shaped by planning policy, Ellis observed. "Costs can also rise if planning rules unduly delay developments, though we are hearing that those kinds of constraints have eased a bit lately," she said."On the supply side, we've already noted the shift to apartment building in recent years. But large apartment projects can be slower to develop and build than tracts of detached houses on greenfield sites."An overstretched household sector is not the best environment to be in should something should go wrong elsewhere in the economy, which is why the Reserve Bank and the Australian Prudential Regulation Authority have emphasised loan serviceability so much of late. "Lenders have become more sophisticated in the ways they assess households' capacity to repay mortgage loans," said Ellis. "Most of them have moved beyond a crude approach of applying a blanket repayment-to-income test."According to Ellis, lenders are more likely to apply an add-on to current interest rates when calculating the repayment they use in their serviceability tests. "So as interest rates fall, the maximum size of loan that borrowers are offered does not increase as much, if at all. This is a prudent practice and, at the margin, it has probably reduced the risk in the mortgage book," she said.