Front Matter
  • 1 0000000404811396 Monetary Fund


  • Executive Summary

  • I. Introduction

  • II. Mortgage Markets around the World

    • A. Benefits of Deep Mortgage Markets

    • B. Factors Associated with Cross-Country Differences in Mortgage Markets

  • III. Housing Finance and Real-estate Booms

    • A. Defining and Identifying Credit Booms and Real-estate booms

    • B. Interaction between Real-estate booms and Credit Booms

  • IV. Policy Implications

  • Tables

  • 1. Characteristics of House-price Booms

  • 2. Macroeconomic Performance during House-price Booms

  • Figures

  • 1. Share of Mortgages to HH Credit and HH Credit to Total Credits, as on 2011

  • 2. The Cross-Section of Outstanding Mortgage Debt/GDP, 2001-2005 Average

  • 3. Development Levels and Mortgage Debt/GDP, 2001-05

  • 4. Mortgages and Homeownership Across US States

  • 5. Cross-Country Differences in LTV and Maturities of Mortgages

  • 6. Cross-Country Differences in Mortgage Interest Type and Funding Models

  • 7. Occurrence of Credit Booms during 1970-2012

  • 8. Occurrence of House-price booms and Credit Booms

  • 9. Change in House Prices and HH Credit during House-price Booms

  • 10. Average Growth of Real GDP during House-price Booms

  • 11. Change in House Prices after House-price Booms

  • 12. Lowest Annual Change in Read GDP after House-price Booms

  • 13. Bad and Good Booms

  • References

Executive Summary

The global financial crisis highlighted the risks associated with real-estate booms. Before the crisis, mortgage booms both fueled and were supported by rising house prices and economic activity. When that spiral inverted, falling house prices and tightened lending standards led to widespread failures and debt overhang. The result was recessions and massive increases in public debt. Yet at least until the crisis, policies in support of mortgage markets were common and considered essential to promote home ownership, social stability, and ultimately economic growth.

Against this background, this note analyzes the conflict between the objective of increasing access to housing finance and the dangers associated with fast-growing housing credit. This analysis is made possible by a new data set on housing finance characteristics, house prices, and household credit for a sample of more than 50 countries. This detailed cross-country analysis confirms some of the findings of previous work, but also offers new valuable insights from which we draw the following broad conclusions.

First, housing finance characteristics vary widely across countries, and several characteristics are correlated with the relative depth of mortgage markets. Larger loan-to-value ratios (LTVs), larger reliance on wholesale funding, and, to some extent, longer loan maturities are positively correlated, together with institutional quality and macro stability, with the depth of a country’s mortgage markets and homeownership rates (with the associated benefits of higher school attainment, higher social capital, lower crime).

Second, some of the housing finance characteristics associated with deeper mortgage markets are also associated with increased risks of crisis. For example, higher LTVs are associated with excessively rapid house-price and credit growth during booms, and wholesale funding is associated with worse outcomes in the aftermath of housing booms.

Third, in this context, both advanced and emerging markets should avoid relaxing house financing standards in order to achieve deeper mortgage markets, and focus first on doing so through improving institutions (for example, legal rights) and the macroeconomic environment.

Fourth, macroprudential policies, and in particular housing finance regulation, should be the first line of defense for handling mortgage market booms, as their narrow focus gives them an advantage over monetary policy. However, their effectiveness beyond the short run has yet to be proven.

Fifth, the role of monetary policy in addressing house-related credit booms should not always be downplayed. Despite the absence of important inflation pressures, about 60 percent of the identified past real-estate booms occurred as a result of, or at the same time as, rapid economic growth and broad high credit growth in the economy. Monetary policy would be a necessary complement of macroprudential measures in those cases.

Finally, dealing effectively with real-estate booms requires a broad mix of policies. Macroprudential and monetary policies are key ingredients, but fiscal incentives and house supply considerations are structural country-specific elements that may bear heavily on the probability of booms occurring and the potential costs of a bust.

Housing Finance and Real-Estate Booms: A Cross-Country Perspective
Author: Mr. Eugenio M Cerutti, Jihad Dagher, and Mr. Giovanni Dell'Ariccia