Macroprudential Policies for Controlling Housing Bubble 2 Running Head
Added on 2021-06-15
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Running Head: Macroprudential Policies for Controlling Housing BubbleMacroprudential Policies Used in Australia and Other Parts of the World to Control HousingBubbleStudent NameInstitutional AffiliationCourse/NumberInstructor NameDue Date
Macroprudential Policies for Controlling Housing Bubble2Macroprudential Policies Used in Australia and Other Parts of the World to Control HousingIntroductionThe housing market in Australia is being faced with the risk of bursting, the higher pricesattracts many investors in this market. This is not bad, but the issue may arise if this market fails and there is a burst, some people are already dependent on the income received from the housing investment. Considering the aftermath of the global recession that was experienced in 2008 and 2009, the government is carefully to prevent such an incidence from recurring. There was a burstin the U.S. housing market while contributed to the GFC (Braude, 2013). Many governments in the world are employing various policies towards controlling the possibility of a bubble. Some ofthese policies include the monetary policies of influencing the money supply circulating in the economy or the interest rate for which people obtain capital for investment; this is done by the Central Bank of each nation. For Australia it’s done by the Reserve Bank of Australia (RBA). Other policies include direct influence by the government by using fiscal policies of influencing the taxation rate on citizens’ income and for corporations, or a change in the spending by the government. The last type of policies is the macroprudential policies which are many; the most common one include regulation on counter cyclical buffers and capital adequacy and leverage caps.Tougher rules on bank loans by the Reserve Bank could minimize the heat in a highly priced housing market. Han (2014) noted that risky lending is the chief aspect behind the heat in the housing market and thus the policy implemented should be targeted to improve the conditions for lending; risky lending should be cracked down. Monetary policies are not efficientin this case because Australia being faced with the problem of low economic growth demands for the interest rate to be maintained at a lower level. Using monetary policies would only mean raising the interest rate which in return would hurt other sectors in the Australian economy. Mostof the times, monetary policies make one situation better off while making another worse off. The government aim is to prevent the housing bubble but at the same time maintain the interest rate at a lower level to boost the rest of the economy. Only macroprudential policies can help the government to achieve the two conflicting goals at the same time (Maino, Imam, Ojima, 2013). Macroprudential measure mean toughening the rules governing housing loans (Galati andMoessner, 2017). Their aim is to discourage banks from provision of riskier loans which accelerates the bubble eventually resulting in a market crash. In 2014, Macroprudential policies
Macroprudential Policies for Controlling Housing Bubble3were considered the latest fad for the government by Glenn Stevens the Chief of Reserve Bank. Saul Eslake a chief economist in Merrill Lynch Bank of America sketched some steps that regulators might take in implementing these macroprudential measures; this also includes the likelihood of being used.Examples of Macroprudential PoliciesStress TestThis is a macroprudential measure most likely implemented by many governments. The banks are required to gauge the ability of the borrower to repay his/her loan if the interest rate rose above the current rate (APRA, 2012). This is most common for banks regardless of whether there is an intervention by the government or not; some of the banks employ this measure on its normal lending. The source of risk that the financial system could be exposed to is directly targeted by implementing this measure which makes it more advantageous. Some of these risks boosting of property demand and demand for credit fueled by low interest rates (Laureys & Meeks, 2017). Borrower still need to benefit from low rates of interest. The head of financial stability for RBA Luci Ellis was reported to be keen on the use of this tool. In 2013, he wrote that regulatory landscape would use stress test as a permanent feature to be an automatic stabilizer without lags implementation.Capital Add-onsThis macroprudential measure is most likely to be implemented. It makes a requirement for more capital to be held by banks against interest-only loans; this is intended to induce the banks to charger higher interest rates to the risky borrowers. This is a form of measure that is specific and well targeted. The problem is that it’s not guaranteed that the cost of retaining capital will induce banks to pass on to the risky borrowers. Some of the disadvantages of this measure as provided by the RBA is that the change in borrowing costs is very small, the speed ofimplementation is low and there is risk that borrowers from the prudentially regulated sector willborrow from the less regulated lenders (non-banks).Kiwis on Loan-to-valuation CapsThis is macroprudential measure is not likely to be implemented. It involve the Central Bank setting down a minimum deposit level which need to be put down by an investor who seek to get a housing loan; loans are only advanced after this condition is met. New Zealand is imposing a limit on mortgages the banks advance to the borrowers on loan-to-valuation ratios
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