Automatic Stabilizers for real estate sector

Adam Posen in his new speech says central banks should not use monetary policy to target asset price booms/bubbles. Instead we need more tools to target the bubbles.

Using monetary policy or interest rates for asset bubbles is like using a hammer to operate a shower. It will only worsen things. What is needed is right tools for a specific problem. He nicely says not everything is a monetary nail  

In a speech at the MPR Monetary Policy and Markets Conference in London today, Adam Posen – an external member of the Bank’s Monetary Policy Committee – discusses how asset price booms might be addressed in the future. He rejects the notion that monetary policy should be used to tackle asset prices, and believes other tools are needed and better suited for the task. In addition to macroprudential policies – such as those outlined in a recent Bank of England discussion paper – Adam Posen suggests there is merit in considering tools that tackle asset prices directly. In particular, he discusses the idea of an automatic stabiliser for housing prices.

What is this auto stabilizer?

He suggests as a complementary policy, changes to real estate taxes and regulation, to provide a counter-cyclical element – automatic stabilisers – to structures already in place in many countries’ housing markets.

Adam Posen stresses that the proposal is “…something modest, without any large implications for tax revenue over the cycle…”. He says: “…it would mean having already existing title fees, capital gains taxes, stamp and transfer taxes, varying over time in line with price developments in the housing market more broadly. …a simple blunt instrument targeted to lean against the wind in real estate prices in an automatic fashion.”

This is a pretty novel idea. He says we need to look more closely at housing bubbles as they create more damage to the economy.

Final thoughts

The bottom-line for monetary policy coming out of the crisis is, if you have a financial problem, use financial policy tools to fix it. That applies to bubbles, which means monetary policy should not be targeting asset prices as well as inflation.” He says: “…the direct role of monetary conditions (and tightening thereof) in the creation of asset price booms is minimal… Financial problems come from something else. Where else? Changes in technology (for equity bubbles) and in financial regulation and supervision (for both equity bubbles and real estate bubbles) are the key drivers. That is the reason for my suggesting a new line of discussion for stabilization policy in addition to the necessary macroprudential proposals for the financial system.”

Excellent stuff as usual from Posen. Loads of food for thought. Full of references and graphs to prove his point.

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8 Responses to “Automatic Stabilizers for real estate sector”

  1. Automatic Stabilizers for real estate sector « Mostly Economics | Real Estate Says:

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  2. Jo Says:

    Small wager with myself:

    The ‘automatic stablizers’ will only be invoked to protect the downside.

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  8. Tej Kohli Says:

    Oh Its amazing but Real Estate is not a TV or refrigerator for which you are trying to use Automatic Stabilizers. Its a Funny .
    Tej Kohli

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