WSJ Blog points to a recent IMF initiative – Housing Markets Monitor. IMF is now going to present the housing trends every quarter. Interestingly, it shows housing prices have declined most in India. Wondering whether there is some other India the IMF is talking about? Where do we see decline in housing prices in India?
Anyways, Min Zhu, Deputy Managing Director, IMF shares his thoughts on housing and policy in this speech and blogpost. He says there are three kinds of policies to tackle housing bubbles — MiP, MaP and MoP:
Regulation of the housing sector involves a complex set of policies—the noted economist Avinash Dixit suggested the acronyms MiP, MaP, MoP to refer to microprudential, macroprudential and monetary policy, respectively.
Microprudential policy aims to ensure the resilience of individual financial institutions. It is necessary for a sound financial system but may not be sufficient; sometimes, actions suitable at the level of individual institutions can destabilize the system as a whole.
Hence we also need macroprudential policies aimed at increasing the resilience of the system as a whole. The main macroprudential tools used to contain housing booms are limits on loan-to-value (LTV) ratios and debt-to-income (DTI) ratios and sectoral capital requirements (Figure 4). Hong Kong SAR has imposed caps on loan-to-value and debt-to-income ratios since 1990s, Korea since 2000s, and during and after the global financial crisis, over 20 advanced and emerging economies have followed their example.
Another macroprudential tool is to impose stricter capital requirements on loans to a specific sector such as real estate. This forces banks to hold more capital against these loans, discouraging heavy exposure to the sector. In many advanced economies—Ireland, Norway, and Spain— and emerging market economies— Estonia, Peru, and Thailand— capital adequacy risk weights were increased on mortgage loans with high loan to value ratios.
Though evidence thus far suggests that macroprudential policies are effective in the short-run in cooling off housing markets, it is clear that honing them remains a work-in-progress.
Finally, there is the monetary policy, which involves the central bank raising interest rates if they want to cool off the housing sector. While monetary policy could be an important tool in many cases in support of macroprudential policies, the optimal allocation of responsibilities between prudential policy and monetary policy remains a matter of much discussion. What is clear however, is that monetary policy will need to be more concerned than it was before with financial stability and hence with housing markets.
The tools for containing housing booms are still being developed. The evidence on their effectiveness is only just starting to accumulate. The interactions of various policy tools can be complex. But all this should not be an excuse for inaction. The interlocking use of multiple tools might overcome the shortcomings of any single policy tool. We need to move from “benign neglect” to an “all of the above” approach when it comes to policy choices.
Does not mention RBI’s measures to mitigate housing bubbles before the crisis…