IT IS widely agreed that a series of collapsing housing-market bubbles triggered the global financial crisis of 2008-09, along with the severe recession that followed. Now, five years later, signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the UK (well, London). In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centres in Turkey, India, Indonesia and Brazil.
Signs of home prices entering bubble territory include fast-rising home prices, high and rising price-to-income ratios, and high mortgage debt as a share of household debt. In most advanced economies, bubbles are being inflated by very low short-and long-term interest rates. Given anaemic economic growth, high unemployment and low inflation, the wall of liquidity generated by monetary easing is driving up asset prices, starting with homes.
The situation is more varied in emerging markets. Some with high per-capita income — such as Israel, Hong Kong, and Singapore — have low inflation and want to maintain low policy interest rates to prevent exchange-rate appreciation against major currencies. Others are characterised by high inflation.
With central banks wary of using policy rates to fight bubbles, most countries are relying on macroprudential regulation and supervision of the financial system to address frothy housing markets. That means lower loan-to-value ratios, stricter mortgage-underwriting standards, limits on second-home financing, higher countercyclical capital buffers for mortgage lending, higher permanent capital charges for mortgages, and restrictions on the use of pension funds for down payments on home purchases.
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| Nouriel Roubini |
Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics
