The effectiveness of macroprudential policy tools in reducing the likelihood of housing price booms: The role of a low interest rate environment

The article estimates the effectiveness of tightening borrower-, capital-, and liquidity-based tools in decreasing the cyclical component of housing price growth and the probability of housing price booms with and without a low interest rate environment. The estimate is based on quarterly data for 41 countries from 2000 Q1 to 2021 Q4. We use the local projections approach to estimate a linear panel model and a logit model. The results highlight the critical role of a low interest rate environment in the design of macroprudential policy tools. In a low interest rate environment, tightening of borrower-based tools raises the probability of housing price booms over the period studied. However, in the absence of a low interest rate environment, borrower-based tools are more effective for decreasing the probability of housing price booms than other tools. Tightening of capital-based tools is moderately effective in lowering the probability of housing price booms in the absence of low interest rates, but in a low interest rate environment, it increases the probability of housing price booms in the first year of the horizon. Lastly, tightening of liquidity-based tools does not have a significant effect on the probability of housing price booms, regardless of interest rates.