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Macroprudential Monetary Policy: What It Is, How it Works; Singapore Shows Asia How To Crack Down on Housing Bubble
Topic Started: 24 Jun 2013, 02:09 PM (661 Views)
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Macroprudential Monetary Policy: What It Is, How it Works

In the old days, like six or seven years ago, one could teach monetary policy at the intro level as consisting of basically one tool: the central bank would lower a particular target interest rates to stimulate the economy out of recessions, and raise that target interest rate when an economy seemed to be overheating. But after the last few years, even at the intro level, one needs to teach about some additional tools available to monetary authorities. One set of tools goes under the name of "macroprudential policy."

The idea here is that in the past, regulation of financial institutions focused on whether individual companies were making reasonably prudent decisions. A major difficulty with this "microprudential" approach to regulation, as the Great Recession showed, is that it didn't take into account whether the decisions of many financial firms all at once were creating macroeconomic risk. In particular, when the central bank was looking at whether the economy was in sinking into recession or on the verge of inflation, it didn't take into account whether the overall level of credit being extended in the economy was growing very rapidly--like in the housing price bubble from about 2004-2007. I discussed some of the evidence on how boom-and-bust credit cycles are often linked to severe recessions in a March 2012 post on "Leverage and the Business Cycle" as well as in a February 2013 post on "The Financial Cycle: Theory and Implications."

Macroprudential policy means using regulations to limit boom-and-bust swings of credit. Douglas J. Elliott, Greg Feldberg, and Andreas Lehnert offer a useful listing of these kinds of policies, how they have been used in the past, and some preliminary evidence on how they have worked in "The History of Cyclical Macroprudential Policy in the United States," written as a working paper in the Finance and Economics Discussion Series published by the Federal Reserve.

One basic but quite useful contribution of the paper is to organize a list of macroprudential policy tools. One set of tools can be used to affect demand for credit, like rules about loan-to-value ratios for those borrowing to buy houses, margin requirements for those buying stocks, the acceptable length of loans for buying houses, and tax policies like the extent to which interest payments can be deductible for tax purposes. Another set of tools affects the supply of credit, like rules about the interest rates that financial institutions can pay on certain accounts, or the interest rates that they can charge for certain loans, along with rules about how much financial institutions must set aside in reserves or have available as capital, any restrictions on the portfolios that financial institutions can hold, and the aggressiveness of the regulators in enforcing these rules. Here's a list of macroprudential tools, with some examples of their past use.

One interesting aspect of these macroprudential policy tools is that many of them are sector-specific. When the central bank thinks of monetary policy as just moving overall interest rates, it constantly faces a dilemma. Is it worth raising interest rates for the entire economy just because there might be a housing bubble? Or just because the stock market seems to be experiencing "irrational exuberance" as in the late 1990s? Macroprudential policy suggests that one might address a housing market credit boom by altering regulations focused on housing markets, or one might address a stock market bubble by altering margin requirements for buying stock.

Do these macroprudential tools work? Elliott, Feldberg, and Lehnert offer some cautious evidence on this point: "In this paper, we use the term “macroprudential tools” to refer to cyclical macroprudential tools aimed at slowing or accelerating credit growth. ... Many of these tools appear to have succeeded in their short-term goals; for example, limiting specific types of bank credit or liability and impacting terms of lending. It is less obvious that they have improved long-term financial stability or, in particular, successfully managed an asset price bubble, and this is fertile ground for future research. Meanwhile, these tools have faced substantial administrative complexities, uneven political support, and competition from nonbank or other providers of credit outside the set of regulated institutions. ... Our results to date suggest that macroprudential policies designed to tighten credit availability do have a notable effect, especially for tools such as underwriting standards, while macroprudential policies designed to ease credit availability have little effect on debt outstanding."

When the next asset-price bubble or credit boom emerges--and sooner or later, it will--macroprudential tools and how best to use them will become a main focus of public policy discussion.

For more background on the economic analysis behind macroprudential policy, a useful starting point is "A Macroprudential Approach to Financial Regulation," by Samuel G. Hansen, Anil K. Kashyap, and Jeremy C. Stein, which appeared in the Winter 2011 issue of the Journal of Economic Perspectives. (Full disclosure: My job as Managing Editor of JEP has been paying the household bills since 1986.) Jeremy Stein is now a member of the Federal Reserve Board of Governors, so his thought on the subject are of even greater interest.

Read more: http://conversableeconomist.blogspot.com.au/2013/06/macroprudential-monetary-policy-what-it.html
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Singapore Shows Asia How To Crack Down on Housing Bubble

By Pooja Thakur - Oct 16, 2013 6:00 AM ET

Singapore, the city-state that banned chewing gum to curb litter, is showing the rest of Asia how to cool a housing bubble.

The government this year ramped up efforts to bring down property prices that surged to a record, adopting some of its strictest measures, including a cap on debt at 60 percent of a borrower’s income, higher stamp duties on home purchases and an increase in real-estate taxes.

The curbs are proving more successful than in neighboring Hong Kong and China where policy makers have experimented with a variety of initiatives to temper soaring housing markets. Home prices in Singapore had the slowest growth in six quarters in the three months ended Sept. 30. Sales declined and mortgage growth fell to 13 percent in July from 18 percent two years ago.

“The government has enacted all these measures quite early,” Vikrant Pandey, a Singapore-based analyst at UOB Kay Hian Pte, the securities unit of Southeast Asia’s third-largest lender, United Overseas Bank Ltd. (UOB), said. “They want to contain a bubble from reaching levels where it brings down the whole system.”

The city-state, on an island off the southern tip of the Malay Peninsula, began introducing curbs four years ago after home prices climbed 25 percent in the two years to 2008. The government of Prime Minister Lee Hsien Loong intensified efforts as prices jumped a further 40 percent, driven by low interest rates, demand from local Singaporeans to upgrade from government to private housing, as well as buyers from China and Southeast Asia.

Tighter Lending

The gains led to Singapore being ranked the most-expensive city to buy a luxury home in Asia after Hong Kong by property broker Knight Frank LLP in a wealth report in March. Shanghai was ranked third and Beijing fourth in the report as of the fourth quarter of 2012.

The average price of a new 1,000-square-foot condominium is between S$1 million ($799,000) and S$1.2 million, according to London-based broker Savills Plc. (SVS) In Hong Kong, where prices have more than doubled since early 2009, the average for a similar size apartment is between HK$8.1 million ($1.04 million) and HK$12.8 million, according to Midland Holdings Ltd. (1200), the city’s biggest realtor.

Payments Capped

In Singapore, the government raised the minimum down-payment on second-home purchases, brought in new taxes for foreign and corporate buyers, and added a stamp duty for all residential properties. The Monetary Authority of Singapore said June 28 that home loans should not exceed a total debt-servicing ratio of 60 percent. In August, the central bank then cut the maximum tenure for new loans to buy public housing, where about 80 percent of Singaporeans live, by five years to 25 years. Mortgage payments were capped at 30 percent of gross monthly incomes, down from 35 percent, according to the Housing & Development Board.

“The loan measures are more lethal than the other measures,” said David Neubronner, national director of residential project sales in Singapore at broker Jones Lang LaSalle Inc. (JLL) “Home prices will remain flat for the next six to nine months.”

The restrictions are already deterring potential buyers such as Jeremy Ong, a Singaporean dentist, who was prepared to spend S$2 million to buy an apartment.

“The latest loan measures are tough and interest rates are going to go up,” said Ong, 32, who had been looking for a three-bedroom apartment near the upscale Orchard shopping district. “I planned to take a loan for 80 percent of the home value, but I’m not sure with the new rules how much I’ll get since I also have a car loan.”

Sales Drop

While an index of private-residential property prices rose to a record 216.2 points in the quarter ended Sept. 30, the 0.4 percent increase was the smallest since the first quarter of 2012, according to preliminary figures from the Urban Redevelopment Authority on Oct. 1.

Apartment prices fell 0.5 percent in prime districts in the third quarter, more than the 0.2 percent decline in the previous three months, the URA data on Oct. 1 showed.

The city’s private home sales slid 48 percent to 742 in August from a year earlier, the authority said in September. In July, sales fell to 482, the lowest in almost four years.

Neubronner estimates private new home sales this year could drop to 15,000 units from 22,197 units in 2012.

“This is what the regulator wants; the key objective is to moderate the loan growth and price correction with the measures put in place,” said Linda Lee, Singapore-based senior vice president of deposits and secured lending at DBS Group Holdings Ltd., Southeast Asia’s largest lender. “They also want the consumer to be more prudent when applying for loans so they can control the overall debt in the country.”

Developer ‘Headwinds’

The slowdown is beginning to hurt developers. CapitaLand Ltd. (FSSTI) and City Developments (CIT) Ltd., Singapore’s two-biggest homebuilders, said in the past three months they expect “headwinds” in the city’s property market because of the latest measures.

Developers’ profit margins for recent residential project sales dropped to 11 percent from 22 percent six months earlier, Standard Chartered Plc analysts, led by Regina Lim, said in a note to clients on Sept. 18. Net profit margins could fall to less than 10 percent over the next 12 months, the report showed.

CapitaLand said in July it sold 139 residential units in the island-state in the three months ended June 30, 31 percent fewer than in the same period last year. City Developments said Aug. 6 it expects the volume of private residential sales to decline and prices to moderate in the mass market segment due to a tightening of bank borrowings.

Slower Growth

“Sales of homes will be lower and the effects on mortgage lending in terms of slower loan growth will continue to be felt over the next few quarters,” said Ken Ang, an analyst at Phillip Securities Pte in Singapore.

Mortgage rates also are rising. Borrowing costs in Singapore, which doesn’t set interest rates to manage monetary policy, are driven by global rates, especially those in the U.S., where bond yields have been rising in the last year as economic growth picks up and the Federal Reserve considers tapering stimulus.

A “vast majority” of mortgage loans in Singapore have a floating rate, which means households will face higher monthly repayments when interest rates “normalize,” the MAS said in July, referring to expectations that rates will start rising.

Borrowers’ Risks

MAS estimates that between 5 percent and 10 percent of borrowers could be over-leveraged on their property purchases with total debt service payments exceeding 60 percent of their income. A 3-percentage-point increase in mortgage rates would boost the proportion of borrowers at risk by as much as 15 percent, according to the MAS.

The average 25-to-30-year floating-mortgage rate has risen to 1.3 percent from about 0.9 percent a year ago, said Keff Hui, a director at Mortgage Supermart Pte, a Singapore-based mortgage brokerage.

That’s a risk Ong, the dentist, says he wants to avoid.

“I’m worried about servicing the loan as interest rates start rising,” he said. “I’m hoping that property prices will come down to more affordable levels.”

Hong Kong, China

Under its first prime minister, Lee Kuan Yew, the city was transformed from a colonial backwater during its independence in 1965 into one of Asia’s most prosperous nations. One of Lee’s key policies was public housing, building modern apartments where 82 percent of Singaporeans now live, according to the Housing & Development Board’s website. The home ownership rate for resident households was at 90.1 percent in 2012, up from 58.8 percent in 1980, according to government data. Lee stepped down as prime minister in 1990 and left the cabinet as minister mentor in 2011.

Singapore isn’t alone in struggling to come up with measures to stem property price gains, though the island-state that banned the sale of chewing gum in 1992, has proven more determined. The government in 2004 eased some of the ban on gum sales.

Hong Kong’s government, in February doubled the stamp duty on all properties above HK$2 million and raised the minimum mortgage down-payment requirements on all non-residential properties as home prices more than doubled since early 2009.

A shortage of supply -- from 2008 to 2012 Hong Kong developers completed the fewest number of units in any five-year period since the government began keeping record in 1985, while regular land sales were halted in 2004 -- ongoing demand from mainland Chinese, as well as less stringent mortgage rules than in Singapore, has seen prices steadily increase. They are up about 5 percent this year, according to an index compiled by Centaline Property Agency Ltd.

Chinese Demand

Demand for homes in China remains unbowed even after the government in March stepped up a campaign targeting cities with excessive price gains and tightening home-purchase limits. Prices in September climbed the most this year from a year earlier, according to private data from SouFun Ltd., as the government has been less inclined to add to the measures and provincial cities, which rely on land sales for revenue, don’t have many incentives to implement them wholeheartedly.

While some may find Singapore’s property rules “draconian,” authorities should be pre-emptive and proactive, said Vishnu Varathan, an economist at Mizuho Bank Ltd.

“It’s commendable,” Singapore-based Varathan said. “These are prudential measures to make sure that you don’t get an Asian version of the mortgage crisis in the U.S.”

Read more: http://www.bloomberg.com/news/2013-10-15/singapore-shows-asia-how-to-crack-down-on-housing-bubble.html
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