Central banks on guard against new housing hot spots


* More banks, regulators reaching for non-monetary measures

* Evidence shows policy activism works, but no magic wand

* Norway a test case for coping with overvalued housing

By Alan Wheatley

LONDON, Sept 19 (Reuters) - Five years after a financialcrash that had its roots in a housing bubble, globalpolicymakers are rapidly increasing the use of targeted lendingcurbs to head off destabilising property market booms and busts.

Authorities have introduced a range of non-monetary measuresin the past year to dampen house price inflation and creditgrowth so borrowers and lenders alike are shielded somewhat wheninterest rates rise from historically low levels.

From Singapore to Sweden, from New Zealand to Switzerland,precautionary policy activism is gathering momentum.

Britain is debating whether a new housing bubble isinflating and what should be done about it, while Norway mightbecome the latest country to require banks to hold more capitalagainst home loans.

Given the post-mortems conducted into the origins of thecrisis, policymakers are likely to keep rolling out such'macroprudential measures', according to Richard Fox, a seniordirector at Fitch Ratings in London.

"In those countries where you've still got a combination ofrapid credit growth and strong property prices, there's been anincreasing prevalence of these sort of measures," Fox said.

"We haven't seen anything particularly drastic yet, butwe're certainly starting to see central banks trying to be a bitmore innovative."


Macroprudential policies aim to reduce the vulnerability ofthe financial system as a whole rather than its component parts.

To skim the froth off property prices, measures to reducethe supply of credit or make it more expensive include limitingthe size of a loan relative to the value of the property andcapping the share of a borrower's income going to service debt.

Other steps are putting a floor under the risk weightsapplied to property loans, increasing provisions on housingloans 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 containingexuberant mortgage loan growth, speculative real estatetransactions, and house price accelerations during the upswing,"a new International Monetary Fund working paper concludes.

There has also been an element of self-regulation amonglenders. Whereas in the boom years, home loans of multiples upto four or five times income were offered in some countries,those days have gone, at least for now.

By dampening the upswing, loan losses and fire sales arereduced when the cycle turns down.

A new database compiled by the Bank for InternationalSettlements that covers 60 countries captures the post-crisisinterest in smoothing the housing credit cycle.

In the 1990s, 85 percent of policy actions fell into the'monetary' category and 15 percent were 'prudential'. Since2010, the latter share has jumped to 39 percent.

It was the U.S. subprime mortgage market collapse thatsparked the world financial crisis. There, bank regulators, waryof upsetting the fragile housing market, are moving cautiouslyin fashioning dozens of new rules to prevent recklessunderwriting and other mortgage market abuses.


Ultra-low global interest rates have given some openeconomies little choice but to resort to macroprudentialmeasures. Raising borrowing costs to douse property marketswould have sucked in even more speculative capital and pushed uptheir exchange rates.

Singapore in June lowered its DTI mortgage cap to 60percent. Concerned about rising household debt, the central bank estimated the proportion of vulnerable borrowers could rise to10-15 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 tighteningLTV ratios rather than raising interest rates. From October, nomore than 10 percent of new home loans can go to mortgages thatexceed 80 percent of a property's value.

In February, Switzerland went much further when it becamethe first country to activate a counter-cyclical capital bufferfor banks' domestic mortgages, requiring them to set aside anextra 1 percentage point of capital for home loans.

Norway's new government is likely to follow suit, with theextra capital requirement applied to all assets, according toErik Bruce, an economist with Nordea in Oslo.


Bruce said Norway's plans highlight a difficulty ofmacro-prudential policy - getting the timing right.

To contain systemic risks, the policy brakes need to beapplied early before dangers loom. In the case of Norway, homesare about 40 percent overvalued, the IMF reckons, but propertyinflation is already slowing - partly due to earlier loan curbs.

For Bruce, tightening housing credit too rapidly couldcrystallise the very risks regulators are trying to avoid.

"To me, it comes a bit late because the market is trying toslow now, and you could spark a downturn in the housing market,"he said.

Norway also illustrates how politics inevitably complicatehouse lending rules.

A proposal by the Finance Ministry to triple the riskweights for mortgages would impose a heavy burden on Norway'smany local and regional savings banks, so politicians will treadcarefully, Knut Anton Mork, an economist with Handelsbanken, said.

The political context will not be lost on the Bank ofEngland's Financial Policy Committee, Britain's macro-prudentialsupervisor, which met on Wednesday.

If a new property bubble is forming, as some politiciansfear, it is due in part to government-subsidised mortgagelending championed by Chancellor of the Exchequer George Osborneto help his Conservative party's 2015 election prospects.

BoE Governor Mark Carney has so far played down worriesabout house prices, which rose 3.3 percent nationwide in theyear to July and by nearly 10 percent in London.

Policymakers are conscious that their activism will takethem only so far. After all, Spain's 'dynamic provisioning'requirements implemented in 2000 to slow credit growth did notprevent a housing bubble and banking crisis.

"We have to recognise we have a pretty limited experiencewith these macroprudential measures. This is really an areawhere there is a bit of 'learning by doing' going on," saidJorgen Elmeskov, deputy chief economist at the Organisation forEconomic Cooperation and Development in Paris.

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