The BIS Committee on the Global Financial System prepared a report that documents recent trends in the residential and commercial property prices in over 20 countries, describes key drivers of price developments, and discusses policy initiatives used to manage the associated risks to the economy and financial stability. A key finding is the evidence of international investors' expanding footprint in many markets. From a policy perspective, their growing importance presents challenges since foreign demand is less sensitive to macro-prudential measures that affect the supply of domestic credit for property investments.
The report finds that property prices have been rising, reaching record highs in many countries. Developments in property markets have a bearing on financial stability and are influenced by instruments related to different areas of public policy. The report highlights that, since the Great Financial Crisis, several countries have implemented macro-prudential policies to bolster financial system resilience, with many focused on containing mortgage credit risk. By and large, macro-prudential measures have targeted the residential rather than the commercial real estate market and they can be grouped into measures that are borrower or property-based and those that are bank capital-based.
- Ceilings (caps) on the ratio of the loan-to-the-property value (LTVs) constitute a popular tool. More than half of the countries participating in the Study Group (Canada, Hong Kong, the Netherlands, Singapore, and Sweden) have taken such measures.
- Income and serviceability measures are borrower-based tools that have been introduced in many countries, such as Australia, Canada, Hong Kong, the Netherlands, Singapore, UK, and the United States. For instance, Singapore, Sweden, and the United States have introduced amortization requirements, restrictions on the availability of interest-only mortgages, and loan-tenure limits. Australia introduced temporary interest-only and investor lending benchmarks, which were removed after lending standards strengthened.
- Several countries (Belgium, France, Hong Kong, Luxembourg, Sweden, and the United States) have taken capital measures, increasing (or introducing a floor under) the risk-weights on residential loans for credit institutions or activating the countercyclical capital buffer. The Netherlands is planning to increase risk-weights on residential loans from 2020 onward.
While an assessment of different policy options is outside the scope of this report, some case studies seem to suggest that fiscal policy actions like foreign buyer taxes could be more effective than macro-prudential policy at reducing the demand of foreign buyers and possibly dampening price growth. Meanwhile, it is hard to distinguish the direct effects of these actions on house prices from the indirect ones. The increased role of international investors poses new challenges for policymakers, such as possible circumvention of regulation and greater complexity of transmission channels.
Keywords: International, Banking, Macro-Prudential Measures, Credit Risk, CCyB, Capital-Based Measure, CGFS, Macro-Prudential Policy, CRE, RRE, Financial Stability, BIS
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