LONDON Five years after a financial crash that had its roots in a housing bubble, global policymakers are rapidly increasing the use of targeted lending curbs to head off destabilizing property market booms and busts.
Authorities have introduced a range of non-monetary measures in the past year to dampen house price inflation and credit growth so borrowers and lenders alike are shielded somewhat when interest 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 is inflating and what should be done about it, while Norway might become the latest country to require banks to hold more capital against home loans.
Given the post-mortems conducted into the origins of the crisis, policymakers are likely to keep rolling out such ‘macroprudential measures', according to Richard Fox, a senior director at Fitch Ratings in London.
"In those countries where you've still got a combination of rapid credit growth and strong property prices, there's been an increasing prevalence of these sort of measures," Fox said.
"We haven't seen anything particularly drastic yet, but we're certainly starting to see central banks trying to be a bit more innovative."
BIG TOOL KIT
Macroprudential policies aim to reduce the vulnerability of the financial system as a whole rather than its component parts.
To skim the froth off property prices, measures to reduce the supply of credit or make it more expensive include limiting the size of a loan relative to the value of the property and capping the share of a borrower's income going to service debt.
Other steps are putting a floor under the risk weights applied to property loans, increasing provisions on housing loans 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 containing exuberant mortgage loan growth, speculative real estate transactions, and house price accelerations during the upswing," a new International Monetary Fund working paper concludes.
There has also been an element of self-regulation among lenders. Whereas in the boom years, home loans of multiples up to 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 are reduced when the cycle turns down.
A new database compiled by the Bank for International Settlements that covers 60 countries captures the post-crisis interest in smoothing the housing credit cycle.
In the 1990s, 85 percent of policy actions fell into the ‘monetary' category and 15 percent were ‘prudential'. Since 2010, the latter share has jumped to 39 percent.
It was the U.S. subprime mortgage market collapse that sparked the world financial crisis. There, bank regulators, wary of upsetting the fragile housing market, are moving cautiously in fashioning dozens of new rules to prevent reckless underwriting and other mortgage market abuses.
THE HEADACHE OF CHEAP MONEY
Ultra-low global interest rates have given some open economies little choice but to resort to macroprudential measures. Raising borrowing costs to douse property markets would have sucked in even more speculative capital and pushed up their exchange rates.
Singapore in June lowered its DTI mortgage cap to 60 percent. Concerned about rising household debt, the central bank estimated the proportion of vulnerable borrowers could rise to 10-15 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 tightening LTV ratios rather than raising interest rates. From October, no more than 10 percent of new home loans can go to mortgages that exceed 80 percent of a property's value.
In February, Switzerland went much further when it became the first country to activate a counter-cyclical capital buffer for banks' domestic mortgages, requiring them to set aside an extra 1 percentage point of capital for home loans.
Norway's new government is likely to follow suit, with the extra capital requirement applied to all assets, according to Erik Bruce, an economist with Nordea in Oslo.
NO MAGIC CURE
Bruce said Norway's plans highlight a difficulty of macro-prudential policy - getting the timing right.
To contain systemic risks, the policy brakes need to be applied early before dangers loom. In the case of Norway, homes are about 40 percent overvalued, the IMF reckons, but property inflation is already slowing - partly due to earlier loan curbs.
For Bruce, tightening housing credit too rapidly could crystallize the very risks regulators are trying to avoid.
"To me, it comes a bit late because the market is trying to slow now, and you could spark a downturn in the housing market," he said.
Norway also illustrates how politics inevitably complicate house lending rules.
A proposal by the Finance Ministry to triple the risk weights for mortgages would impose a heavy burden on Norway's many local and regional savings banks, so politicians will tread carefully, Knut Anton Mork, an economist with Handelsbanken, said.
The political context will not be lost on the Bank of England's Financial Policy Committee, Britain's macro-prudential supervisor, which met on Wednesday.
If a new property bubble is forming, as some politicians fear, it is due in part to government-subsidised mortgage lending championed by Chancellor of the Exchequer George Osborne to help his Conservative party's 2015 election prospects.
BoE Governor Mark Carney has so far played down worries about house prices, which rose 3.3 percent nationwide in the year to July and by nearly 10 percent in London.
Policymakers are conscious that their activism will take them only so far. After all, Spain's ‘dynamic provisioning' requirements implemented in 2000 to slow credit growth did not prevent a housing bubble and banking crisis.
"We have to recognise we have a pretty limited experience with these macroprudential measures. This is really an area where there is a bit of 'learning by doing' going on," said Jorgen Elmeskov, deputy chief economist at the Organisation for Economic Cooperation and Development in Paris.
(Editing by Mike Peacock)