Financial Stability and Housing Markets in Large Cities: What Role for Macroprudential Policy?

In recent years, house prices in large cities increased sharply in many euro area countries and around the world. A role for macroprudential policy in addressing vulnerabilities can be motivated by the systemic importance of large cities (e.g. in terms of contribution to real estate activity, concentration of bank exposures and share of urban population), at least in some countries, and by the important spillover effects of house price dynamics to the rest of the country. Nevertheless, a number of factors suggest limits to the effectiveness of macroprudential policy in addressing vulnerabilities in large cities. These factors include data gaps, interactions with other policy domains, global factors and foreign investors, and limited effectiveness of some instruments due to potential leakages. Despite these limitations, macroprudential policy can still play a role by adopting communication strategies to raise awareness on risks and by taking measures to prevent disruptions in the financial system when credit risk materialise. The latter policy objective can be met by using capital measures, improving lending standards and limiting bank exposures to geographical areas or specific borrowers.