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Taming the Real Estate Beast via Macroprudential Tools

Taming the Real Estate Beast via Macroprudential Tools

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Published by: leithvanonselen on Dec 11, 2012
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CONFereNCe vOlume
Taming the Real Estate Beast:The Effects of Monetary andMacroprudential Policies on HousingPrices and Credit
Kenneth Kuttner and Ilhyock Shim
1. Introduction
Recent events have underscored the importance o asset price booms and busts as sourceso inancial instability. Unsustainable property price appreciation igured prominently in the2007–2009 inancial crisis, in the 1997–1998 Asian inancial crisis, and in Japan’s property marketcollapse in the early 1990s. Monetary policy has come under intense scrutiny as a possible actorcontributing to the escalation in real estate prices, with some blaming the US Federal Reserve’slow interest rate policy or creating a bubble in the US housing market. These tumultuous experiences have generated a great deal o interest in two interrelatedquestions. The irst is the extent to which housing price and credit movements are explainedby changes in interest rates and, by extension, whether monetary policy would be eective inattenuating housing market excesses. The second concerns the eectiveness o non-interestrate policies, such as prudential regulation, as additional tools or stabilising housing price andcredit cycles. This is a crucial issue or central banks seeking to ensure inancial stability whilesimultaneously using interest rate policy in the pursuit o macroeconomic objectives. And it isespecially pressing or countries with ixed or heavily managed exchange rates, where there islimited scope or interest rate policy to address property market imbalances. This paper empirically addresses both o these questions using data rom 57 economies goingback as ar as 1980. The scope is thereore considerably broader than most existing work, such asGirouard
et al 
(2006), which has mostly been limited to a smaller set o industrialised countries.We ocus in particular on the Asia-Paciic region where non-interest rate policy measures havebeen used more actively than elsewhere.Our investigation ocuses on three classes o policy measures intended to aect housing pricesand housing credit. The irst consists o non-interest rate monetary policy actions, primarilychanges in reserve requirements. The second category includes ive distinct prudential policymeasures: (i) maximum loan-to-value (LTV) ratios; (ii) maximum debt-service-to-income (DSTI)ratios; (iii) risk weights on mortgage loans; (iv) loan-loss provisioning rules; and (v) exposure limits
* We are grateul or comments by seminar participants at the Bank or International Settlements. We thank Bilyana Bogdanova,Marjorie Santos, Jimmy Shek and Agne Subelyte or their excellent research assistance. The views presented here are solely thoseo the authors and do not necessarily represent those o the Bank or International Settlements.
ReseRve bank of austRaliakenneth kuttneR and ilhyock shim
to the property sector. The third category consists o iscal policy measures such as capital gainstax at the time o sale o properties and stamp duties. One o the contributions o this paper isthe compilation o an extensive dataset on the implementation o these macroprudential policiesor a wide range o economies.
We assess these policies’ eects using panel regressions o housing price growth and housingcredit growth, with models that also include controls or other actors aecting the housingmarket, such as rent, personal income and institutional eatures o the housing inance system.With regard to housing prices, our main indings are that increases in short-term interest rates andin the maximum LTV and/or DSTI ratios have strong, statistically signiicant eects. These resultshold or several alternative model speciications, and in sub-samples that exclude the periodaected by the inancial crisis. Regarding the impact on housing credit, our results consistentlyshow that limiting LTV and/or DSTI ratios and increasing loan-loss provisioning requirements tendto slow credit growth. Tax policies and exposure limits were also ound to have the desired eects,although these results are sensitive to sample period and model speciication. Taken together,our results suggest that macroprudential policies can be eective tools or stabilising housingprice and credit cycles. The plan o the paper is as ollows. Section 2 surveys the existing evidence on the eects o monetary policy, inancial structure and regulation. Section 3 outlines the standard theory o property prices, which will be used as a ramework or understanding the potential roles o monetary policy, inancial innovation and regulation in contributing to (or attenuating) propertymarket luctuations. Section 4 sketches the empirical approach. Section 5 describes the dataused in the analysis, whose unique eature is an exhaustive compilation o a range o policymeasures aimed at inluencing conditions in the housing market. Section 6 reports the results,and Section 7 concludes.
2. Existing Evidence
Research on the eects o monetary and regulatory policies on the property market tends to allinto one o two categories. One strand o the literature, surveyed in Section 2.1, emphasises theeects o interest rates. The second strand ocuses on macroprudential policies, oten making useo cross-country or event-study methods. This literature is summarised in Section 2.2. The analysisin this paper combines elements o both.
2.1 The effects of interest rates
Many studies have documented the cyclical co-movement between interest rates and housingprices. Claessens, Kose and Terrones (2011), or example, show that housing prices are stronglyprocyclical in most countries. Ahearne
et al 
(2005) ind that low interest rates tend to precedehousing price peaks, with a lead o approximately one to three years. While these patterns aresuggestive, discerning the impact o interest rates
 per se
is complicated by the act that other
1 Following FSB-IMF-BIS (2011), macroprudential policy is characterised by reerence to the ollowing three deining elements:(i) objective – to limit systemic risk; (ii) scope – the ocus is on the inancial system as a whole; and (iii) instruments and associatedgovernance – it uses primarily prudential tools calibrated to target the sources o systemic risk. In this paper, we use the term‘macroprudential policy’ to reer to non-interest rate monetary policy, prudential policy and iscal policy designed to inluencehousing prices and housing credit.
CONFereNCe vOlume
TamiNg The real esTaTe BeasT
macroeconomic actors aecting the demand or housing vary along with the interest rate.Moreover, it is impossible to tell rom purely descriptive analysis whether the magnitude o thehousing price variations are consistent with the eects implied by user cost theory. Taking a more structured approach, Dokko
et al 
(2009) use time series methods to constructhousing price orecasts under alternative interest rate path assumptions in an eort to determinethe extent to which low interest rates contributed to the housing price boom in the United Statesin the mid 2000s. They ind that deviations rom the Taylor rule explain only a small portion o the pre-crisis rise in property values, casting doubt on Taylor’s (2007, 2009) assertion that overlyexpansionary monetary policy caused the boom.A number o papers have used vector autoregressions (VARs) to gauge the impact o monetarypolicy shocks on housing prices. The our studies using this method summarised in Table 1 ind astatistically signiicant impact o monetary policy on housing prices. Estimates o the maximumimpact o a 25 basis point monetary policy shock on the level o housing prices range rom 0.3 percent to 0.9 per cent.
This is rather modest in economic terms, as it implies that a ull percentagepoint contractionary shock would have reduced housing prices by less than 4 per cent. Table 1also illustrates the sensitivity o the estimated dynamics to the identiying assumption: Del Negroand Otrok (2007) report a large contemporaneous response, while the other three papers’ resultssuggest a more gradual adjustment process.
Table 1: VAR Estimates of Monetary Policy Shocks’Impact on Housing Prices
Per cent
Impact of a 25 basis point expansionary shock 
Immediate 10 quarters Long run
Del Negro and Otrok (2007), Figure 5:United States, 198620050.90.20Goodhart and Homann (2008),Figure 3: 17 OECD countries,1985200600.40.8Jarociński and Smets (2008), Figure 4:United States, 1995200700.50Sá, Towbin and Wieladek (2011),Figure 4: 18 OECD countries,198420060.10.30.1An alternative approach to assessing interest rates’ contribution to housing price luctuations isderived rom the user cost model. As discussed in Section 3, this model is based on a relationshiplinking the price o a property to the present value o uture rents. One key implication o themodel is that rents and property prices should be cointegrated, a possibility that has beeninvestigated by Girouard
et al 
(2006) or OECD countries, Mikhed and Zemčík (2007) or the Czech
2 These VAR-based estimates are comparable to those obtained by Glaeser, Gottlieb and Gyourko (2010) using a simple regression o the log housing price on the real 10-year interest rate. The estimates o Glaeser
et al 
indicate that a 10 basis point reduction in themortgage interest rate (roughly the rate reduction associated with a 25 basis point expansionary monetary policy shock) wouldresult in a 0.7 per cent rise in housing prices.

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