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Back to Housing Bubbles - After the Storm
In most economies, these macroprudential policies are modest,
owing to policymakers’ political
constraints: households, real estate
developers and elected officials
protest loudly when the central bank
or the regulatory authority in charge
of financial stability tries to take
away the punch bowl of liquidity.
They complain bitterly about
regulators’ “interference” with the
free market, property rights and the
sacrosanct ideal of home ownership.
Thus, the political economy of
housing finance limits regulators’
ability to do the right thing.
It is widely agreed that a series of
collapsing housing market bubbles
triggered the global financial crisis
of 2008 / 09, along with the severe
recession that followed.
While the US is the best-known case,
a combination of lax regulation and
supervision of banks and low policy
interest rates fuelled similar bubbles
in the UK, Spain, Ireland, Iceland and
Dubai.
Now, five years later, signs of
frothiness, if not outright bubbles,
are reappearing in housing markets
in Switzerland, Sweden, Norway,
Finland, France, Germany, Canada,
Australia, New Zealand and, back for
an encore, the UK (well, London).
In emerging markets, bubbles are
appearing in Hong Kong, Singapore,
China and Israel, and in major urban
centres in Turkey, India, Indonesia
and Brazil.
The situation is more varied in
emerging market economies. Some
that have high per capita income
— for example, Israel, Hong Kong
and Singapore —have low inflation
and want to maintain low policy
interest rates to prevent exchangerate appreciation against major
currencies.
Others are characterised by high
inflation (even above the central
bank target, as in Turkey, India,
Indonesia and Brazil). In China
and India, savings are going into
home purchases because financial
repression leaves households with
few other assets that provide a good
hedge against inflation.
Rapid urbanisation in many
emerging markets has also driven
up home prices as demand outstrips
supply.
Signs that home prices are entering
bubble territory in these economies
include fast-rising home prices, high
and rising price-to-income ratios,
and high levels of mortgage debt as
a share of household debt.
With central banks — especially
in advanced economies and the
high-income emerging economies
— wary of using policy rates to fight
bubbles, most countries are relying
on macro-prudential regulation and
supervision of the financial system
to address frothy housing markets.
In most advanced economies,
bubbles are being inflated by
very low short and long-term
interest rates. Given anaemic GDP
growth, high unemployment and
low inflation, the wall of liquidity
generated by conventional and
unconventional monetary easing is
driving up asset prices, starting with
home prices.
That means lower loan-tovalue ratios, stricter mortgageunderwriting standards, limits on
second-home financing, higher
counter-cyclical capital buffers for
mortgage lending, higher permanent
capit [