The International Monetary Fund recommended in a housing study released today that central banks in countries with more developed mortgage markets such as the U.S. should take home prices into account when crafting monetary policy. However, monetary policy shouldn’t directly target housing prices, it said.
“Given the uncertainty surrounding both the shocks hitting the economy and the effects of interest rates on asset-price bubbles, house prices should be one of the many elements to be considered in assessing the balance of risks to the outlook, within a risk-management approach to monetary policy,” said authors Roberto Cardarelli, Deniz Igan and Alessandro Rebucci.
Ireland, the U.K., the Netherlands, and France appear the most vulnerable to a further correction in home prices, the IMF said, adding “it is difficult to account for the magnitude of the run-up in house prices on the basis of those countries’ fundamentals.”
The IMF’s housing study found that housing prices are more sensitive to monetary policy in countries with the most developed mortgage markets, such as the U.S., Denmark, Australia, Sweden and the Netherlands. Financing innovations have made access to credit easier in those countries, where secondary markets are a bigger source of funding. Out of the 17 developed countries in the study, France, Italy and Germany rank at the bottom, suggesting tougher access to credit and less sensitivity to monetary policy measures.
The study also found that the housing sector has a bigger economic impact in countries with more developed mortgage markets, since the use of homes as collateral “strengthens the feedback effect of rising house prices on consumption via increased household borrowing.”
On the role of central banks, the IMF said that In the U.S., where the subprime mortgage crisis has sapped strength from the economy and roiled global credit markets, “easy monetary policy at the beginning of the current decade seems to have contributed to the run up of housing prices and residential investment,” the authors said. Loose lending standards and “excessive risk-taking” by lenders also likely contributed to the bubble, they added.
The IMF made the projections in the analytical chapters of its semiannual World Economic Outlook; the chapters were released in advance of the report’s publication next Wednesday. – Tom Barkley