The Effects of Macroprudential Instruments on Real Estate Cycles

After the bursting of real estate bubbles in the US, the UK, Ireland and Spain the regulatory paradigm has shifted towards a system-wide approach to financial supervision which includes the supervision of real estate markets. Real estate has entered the focus of financial supervisors since real estate bubbles and credit bubbles mostly move in tandem and in contrast to equity price bubbles credit bubbles have long lasting negative effects on economic growth. As of now, property markets are increasingly attracting the attention of financial supervisors and instruments for intervening in real estate markets were developed, like loan-to-value ratios, sectoral risk weights for banks as well as the counter cyclical capital buffer in bank regulation which all will have effects on real estate financing. This paper analyses the effects of these macroprudential tools on real estate finance and property prices. As a first step the identification of real estate price bubbles and credit bubbles is discussed. The paper focusses then on the working of macroprudential instruments and their transmission to credit and real estate markets. After that the paper discusses the risk of potential policy failures through the application of macroprudential instruments, like the occurance of false positives in the identification of real estate bubbles as well as the risk of excluding parts of the population from real estate markets through restricting their access to real estate financing.