Containing Housing Price Appreciation: Assessing The Options

There’s a growing body of work examining the effect of macroprudential policies on asset prices. This one offers a fairly comprehensive assessment (abstract):

Can Non-Interest Rate Policies Stabilize Housing Markets? Evidence from a Panel of 57 Economies
Kenneth N. Kuttner, Ilhyock Shim

Using data from 57 countries spanning more than three decades, this paper investigates the effectiveness of nine non-interest rate policy tools, including macroprudential measures, in stabilizing house prices and housing credit. In conventional panel regressions, housing credit growth is significantly affected by changes in the maximum debt-service-to-income (DSTI) ratio, the maximum loan-to-value ratio, limits on exposure to the housing sector and housing-related taxes. But only the DSTI ratio limit has a significant effect on housing credit growth when we use mean group and panel event study methods. Among the policies considered, a change in housing-related taxes is the only policy tool with a discernible impact on house price appreciation.

Three classes of policy actions were assessed – general credit policies (e.g. reserve or liquidity requirements), targeted credit policies (e.g. LTV ratios), and taxes (e.g. RPGT; stamp duties).

As per the abstract, only debt service ratios had a consensus impact on mortgage growth, while taxes were the only policy measure to directly affect house prices. Most countries have implemented more than one policy measure simultaneously (for example DSTI and LTV ratios together), but these are the ones that actually matter – the former on housing credit, and the latter on housing prices.

Malaysia for instance raised the LTV for third homes concurrently with enforcement of DSTI ratios for the banking industry; RPGT was subsequently raised recently i.e. trying to hit both sides of the credit-price nexus.

In the end however, over the long term it still boils down to raising the supply of housing to match demand. Based on previous research, macro-prudential measures are generally only stop-gaps which have only a temporary impact (<1 year) on loan growth and house prices.

Technical Notes

Kuttner, Kenneth N. & Ilhyock Shim, "Can Non-Interest Rate Policies Stabilize Housing Markets? Evidence from a Panel of 57 Economies", NBER Working Paper No. 19723, December 2013