Taming the Real Estate Beast : The Effects of Monetary and Macroprudential Policies on Housing Prices and Credit

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Date Published 2012
Primary Author Kenneth Kuttner and Ilhyock Shim
Other Authors
Theme Regulation and Supervision of Housing Finance Systems


Investigation focuses on three classes of policy measures intended to affect housing prices and housing credit. The first consists of non-interest rate monetary policy actions, primarily changes in reserve requirements. The second category includes five distinct prudential policy measures: (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.to the property sector. The third category consists of fiscal policy measures such as capital gains tax at the time of sale of properties and stamp duties. One of the contributions of this paper is the compilation of an extensive dataset on the implementation of these macroprudential policies for a wide range of economies.1 We assess these policies’ effects using panel regressions of housing price growth and housing credit growth, with models that also include controls for other factors affecting the housing market, such as rent, personal income and institutional features of the housing finance system. With regard to housing prices, our main findings are that increases in short-term interest rates and in the maximum LTV and/or DSTI ratios have strong, statistically significant effects. These results hold for several alternative model specifications, and in sub-samples that exclude the period affected by the financial crisis. Regarding the impact on housing credit, our results consistently show that limiting LTV and/or DSTI ratios and increasing loan-loss provisioning requirements tend to slow credit growth. Tax policies and exposure limits were also found to have the desired effects, although these results are sensitive to sample period and model specification. Taken together, our results suggest that macroprudential policies can be effective tools for stabilising housing price and credit cycles.

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