Macroprudential policies can mitigate the financial-stability risks of housing markets: Committee

• Macroprudential policies can mitigate financial-stability risks arising from housing market boom-bust cycles.
• New report from Committee on the Global Financial System presents four key lessons from 14 jurisdictions.
• Implementation of these policies has helped boost resilience of lenders and borrowers.

Macroprudential policies can significantly mitigate the financial risks associated with boom-bust cycles in the housing market, according to a report released today by the Committee on the Global Financial System (CGFS).

In the report, the CGFS – a central bank forum for assessing risks to financial stability, hosted by the Bank for International Settlements – distils four key lessons for policymakers from experiences in 14 jurisdictions.

• Macroprudential policy is not the only tool in town. Successful mitigation of the boom-bust cycles in housing markets requires consistency across housing-related policies including tax, planning and land supply.
• Governance arrangements directly impact policy effectiveness. Policies are better targeted when macroprudential authorities have a clear mandate, operational independence and a legal basis to direct policy across the full range of macroprudential tools.
• Inaction bias can be mitigated by prioritising tools that meet objectives without requiring adjustment. Guardrails, such as income-based borrowing limits, help to maintain resilience during housing market upswings and periods of sharp interest rate swings.
• Being open about cost-benefit trade-offs can foster long-term support for macroprudential policies. The benefits of successful policy actions are largely invisible and dispersed across the economy. Authorities have taken important steps to mitigate potential costs.

Implementation of these policies over the past decade in many countries has helped make lenders and borrowers more resilient to the strong increases in interest rates that have been needed to bring inflation back to target.

The report highlights that certain tools address specific intermediate policy objectives better than others. Macroprudential authorities have experimented with a variety of tools and now have a relatively good understanding of which tools work for which objectives.

The report notes that, despite initial reservations, these policies have generally been accepted by the public and also by financial institutions as helpful complements to other housing-related policies.

Notes to editors:

The Committee on the Global Financial System is a central bank forum set up to monitor and examine broad issues relating to financial markets and systems, It makes policy recommendations to support central banks in fulfilling their responsibilities for monetary and financial stability. It is chaired by Chang Yong Rhee, Governor of the Bank of Korea, and has 28 member central banks. For more information, see About the CGFS