Abstract
Recent studies provide extensive evidence that housing booms and busts are an important cause of banking crises.1 The IMF has devised four measures to estimate the costs of financial crises: fiscal costs arising from financial sector rescue packages, output losses, increase in public debt, and peak non-performing loans. In 2009, an IMF estimate placed the total cost of the 2008 world financial crisis at an astonishing US$11.9 trillion, or the equivalent of approximately one-fifth of the entire globe’s annual economic output,2 while another estimate was that up to 45 per cent of the world’s wealth had been destroyed in less than 18 months. Although costs estimates have since been revised downwards substantially, the potential outlay still dwarfed any previous cost estimates of financial crises.3
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Notes
See, for example, Carmen Reinhart and Kenneth Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton, NJ: Princeton University Press, 2009); and Christopher Crowe, Giovanni Dell’Ariccia, Deniz Igan and Pau Rabanal, “How to Deal with Real Estate Booms: Lessons from Country Experiences” (IMF Working Paper WP/11/91, 2011).
Edmund Conway, “IMF Puts Total Cost of Crisis at £7.1 trillion”, The Telegraph, 8 August 2009.
Joon-Ho Hahm, Frederic S. Mishkin, Hyun Song Shin and Kwanho Shin, “Macroprudential Policies in Open Emerging Economies” (NBER Working Paper 17780, 2012).
Nouriel Roubini, “Why Central Banks Should Burst Bubbles”, International Finance, Vol. 9, Issue 1, 2006, pp. 87–107.
See Roubini, ibid., for UK, Australia and New Zealand episodes. For Swedish episode, see Stefan Ingves, “Housing and Monetary Policy — a View from an Inflation Targeting Bank” (speech at the Federal Reserve Bank of Kansas City’s Economic Symposium, 1 September 2007; http://www.bis.org/review/r070910b.pdf ).
Given the illiquidity of markets, Professor Robert Shiller has advocated the creation of liquid markets in real estate derivatives for hedging housing price risk. In 2006, the Chicago Mercantile Exchange began trading housing futures contracts and options based on the S&P/Case-Shiller Home Price Indices. However, low trading volumes indicate that few have been willing to utilize this mechanism. See G. Donald Jud and Daniel T. Winkler, “The Housing Futures Market”, Journal of Real Estate Literature, Vol. 17, No. 2, 2009, pp. 181–203. More recently, Shiller has advocated creating mortgages with principal balances that automatically adjust to the regional level of house prices (continuous workout mortgages). This will allow borrowers to transfer house price risk to lenders without relying on costly foreclosures to do so. See Robert Shiller, “The Mortgages of the Future”, New York Times, 20 September 2008.
These estimates are from Katrin Assenmacher-Wesche and Stefan Gerlach, “Financial Structure and the Impact of Monetary Policy on Property Prices”, 2010 (http://www.stefangerlach.com/). The authors use a vector auto-regression methodology to study the relationship between inflation, real GDP, credit, interest rates and housing prices in 18 OECD countries using quarterly data from 1986 to 2009.
See Soon-taek Chang, “Mortgage Lending in Korea: An Example of a Countercyclical Macroprudential Approach” (World Bank, Policy Research Working Paper 5505, December 2010).
See Gabriele Galati and Richhild Moessner, “Macroprudential Policy — a Literature Review” (Bank for International Settlements Working Paper No. 337, 2011); Bank of England, “Instruments of Macroprudential Policy: A Discussion Paper” (December 2011); and the study by IMF economists Crowe et al., op. cit., note 1.
See Torsten Wezel, Jorge A. Chan-Lau and Francesco Columba, “Dynamic Loan Loss Provisioning: Simulations on Effectiveness and Guide to Implementation” (IMF Working Paper WP/12/110, 2012).
See Appendix section of Matthew S. Yiu, Jun Yu and Lu Jin, “Detecting Bubbles in Hong Kong Residential Property Market” (Singapore Management University Centre for Financial Econometrics Working Paper 03–2012, May 2012).
See Hong Kong Monetary Authority, Hong Kong Monetary Authority Annual Report 2011, p. 55.
See Hong Kong Monetary Authority, “Prudential Supervisory Policies for Mortgage Lending”, 14 September 2012 (http://www.info.gov.hk/gia/general/201209/14/P201209140578.htm).
See Monetary Authority of Singapore, Financial Stability Review, 2011 (http://www.mas.gov.sg/en/Regulations-and-Financial-Stability /Financial-Stability/2011/FSR-Novemeber-2011.aspx).
See Peter C. B. Phillips, and Jun Yu, “Dating the Timeline of Financial Bubbles during the Subprime Crisis”, Quantitative Economics, Vol. 2, 2011, pp. 455–491. For the Hong Kong study, see Yiu, et al., op.cit., note 17. For the Singapore results, see article by Peter C. B. Phillips and Jun Yu, “Warning Signs of Future Asset Bubbles”, The Straits Times, 26 April 2011, p. A25.
See, for example, Eloisa Glindro, Tientip Subhanij, Jessica Szeto and Haibin Zhu, “Determinants of House Prices in Nine Asia-Pacific Economies”, International Journal of Central Banking, Vol. 7, No. 3, September 2011, pp. 163–204. In their study, external environment refers to general economic climate conditions.
Robert Lucas, “Econometric Policy Evaluation: A Critique”, Carnegie- Rochester Conference Series on Public Policy, Vol. 1, No. 1, 1976, pp. 19–46.
See Frank Leung, Kevin Chow and Gaofeng Han, “Long-Term and Short-Term Determinants of Property Prices in Hong Kong” (Hong Kong Monetary Authority Working Paper 15/2008, 2008); and Lily Chan, Heng Tiong Ng and Rishi Ramchand, “A Cluster Analysis Approach to Examining Singapore’s Property Market”, in Bank for International Settlements and Monetary Authority of Singapore, Property Markets and Financial Stability (BIS Papers No. 64, 2012).
See the joint report by the Financial Stability Board, International Monetary Fund, and Bank for International Settlements, Macroprudential Policy Tools and Frameworks: Progress Report to G20, 27 October 2011.
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© 2013 Sock-Yong Phang
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Phang, SY. (2013). Policy Response to Housing Booms. In: Housing Finance Systems. Palgrave Macmillan, London. https://doi.org/10.1057/9781137014030_10
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DOI: https://doi.org/10.1057/9781137014030_10
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