There is a considerable amount of research that seeks to determine the extent to which retail market participants exert market discipline on banks either through the price approach (the correlation of price to risk), or the quantity approach (the movement of funds in response to changes in risk). In this paper we propose and implement a third approach: the retail market conditions approach. We seek to determine if the prerequisites for the exertion of effective market discipline by stakeholder monitors, as set out in Llewellyn and Mayes (2003. The role of market discipline in handling problem banks. Bank of Finland Discussion Papers. extlesshttp://www.bof.fi/eng/7_tutkimus/index.stm extgreater (retrieved 13.04.04)), prevail by directly examining conditions that prevail among retail market participants. We find little evidence to support the proposition that they are being met among New Zealand retail depositors.

This paper investigates how changes in the central bank policy and retail mortgage rates affected real housing prices in New Zealand during the period 1999–2009. We find that real interest rates are significantly and positively related to real housing prices, indicating that increases in the policy rate may not be effective in depressing real housing prices. By testing interest rates, we also find some evidence of housing price bubbles. Our findings suggest that the central bank could have limited housing price bubbles if it had started to intervene in the housing market prior to 2003. Our results set international exemplars for using policy rates or macroprudential tools to cool the housing market, where the extent of policy rate adjustments is limited by internal or external economic factors.