Five years after a financial crash that had its roots in a housing bubble, global policymakers are rapidly increasing the use of targeted lending curbs to head off destabilizing property market booms and busts.
Authorities have introduced a range of non-monetary measures in the past year to dampen house price inflation and credit growth so borrowers and lenders alike are shielded somewhat when interest rates rise from historically low levels.
From Singapore to Sweden, from New Zealand to Switzerland, precautionary policy activism is gathering momentum.
Policymakers are likely to use ‘macroprudential measures', these aim to reduce the vulnerability of the financial system as a whole rather than its component parts.
To skim the froth off property prices, measures to reduce the supply of credit or make it more expensive include limiting the size of a loan relative to the value of the property and capping the share of a borrower's income going to service debt.
Other steps are putting a floor under the risk weights applied to property loans, increasing provisions on housing loans and limiting banks' exposure to the housing sector.
The evidence is that loan-to-value (LTV) and debt-to-income (DTI) caps in particular are hitting the mark.
"These measures have been found successful in containing exuberant mortgage loan growth, speculative real estate transactions, and house price accelerations during the upswing," a new International Monetary Fund working paper concludes.
Ultra-low global interest rates have given some open economies little choice but to resort to macroprudential measures. Raising borrowing costs to douse property markets would have sucked in even more speculative capital and pushed up their exchange rates.
Singapore in June lowered its DTI mortgage cap to 60 percent. Concerned about rising household debt, the central bank estimated the proportion of vulnerable borrowers could rise to 10-15 percent if mortgage rates - well below 2 percent a year - were to rise by 3 percentage points.
With house prices at record highs, New Zealand is tightening LTV ratios rather than raising interest rates. From October, no more than 10 percent of new home loans can go to mortgages that exceed 80 percent of a property's value.
In February, Switzerland went much further when it became the first country to activate a counter-cyclical capital buffer for banks' domestic mortgages, requiring them to set aside an extra 1 percentage point of capital for home loans.
Source: Reuters
