The global financial crisis highlighted the risks associated with real-estate booms. Before the crisis,
mortgage booms both fueled and were supported by rising house prices and economic activity.
When that spiral inverted, falling house prices and tightened lending standards led to widespread
failures and debt overhang. The result was recessions and massive increases in public debt. Yet at
least until the crisis, policies in support of mortgage markets were common and considered essential
to promote home ownership, social stability, and ultimately economic growth.
Against this background, this note analyzes the conflict between the objective of increasing access to
housing finance and the dangers associated with fast-growing housing credit. This analysis is made
possible by a new data set on housing finance characteristics, house prices, and household credit for
a sample of more than 50 countries. This detailed cross-country analysis confirms some of the
findings of previous work, but also offers new valuable insights from which we draw the following
First, housing finance characteristics vary widely across countries, and several characteristics are
correlated with the relative depth of mortgage markets. Larger loan-to-value ratios (LTVs), larger
reliance on wholesale funding, and, to some extent, longer loan maturities are positively correlated,
together with institutional quality and macro stability, with the depth of a country’s mortgage
markets and homeownership rates (with the associated benefits of higher school attainment, higher
social capital, lower crime).
Second, some of the housing finance characteristics associated with deeper mortgage markets are
also associated with increased risks of crisis. For example, higher LTVs are associated with
excessively rapid house-price and credit growth during booms, and wholesale funding is associated
with worse outcomes in the aftermath of housing booms.
Third, in this context, both advanced and emerging markets should avoid relaxing house financing
standards in order to achieve deeper mortgage markets, and focus first on doing so through
improving institutions (for example, legal rights) and the macroeconomic environment.
Fourth, macroprudential policies, and in particular housing finance regulation, should be the first
line of defense for handling mortgage market booms, as their narrow focus gives them an advantage
over monetary policy. However, their effectiveness beyond the short run has yet to be proven.
Fifth, the role of monetary policy in addressing house-related credit booms should not always be
downplayed. Despite the absence of important inflation pressures, about 60 percent of the identified
past real-estate booms occurred as a result of, or at the same time as, rapid economic growth and
broad high credit growth in the economy. Monetary policy would be a necessary complement of
macroprudential measures in those cases.
Finally, dealing effectively with real-estate booms requires a broad mix of policies. Macroprudential
and monetary policies are key ingredients, but fiscal incentives and house supply considerations are
structural country-specific elements that may bear heavily on the probability of booms occurring and
the potential costs of a bust.