First, there are real worries again:
The world must act to contain the risk of another devastating housing crash, the International Monetary Fund warned on Wednesday, as it published new data showing house prices are well above their historical average in many countries.
IMF sounds global housing alarm
New data showing the return of a couple of old friends — subprime mortgages and so-called "jumbo loans" — have some people worried that recent history is repeating itself. Just six years after a housing bubble nearly tipped the world into a new depression, home prices in California and Florida are climbing precipitously – enough to prompt the real estate listing company Trulia to rank much of the property in these two traditionally frothy state markets as overvalued.
Some scary practices return to US property market, but the bubbles are overseas
But all this is not terribly difficult to stop, as at least some seem to realize:
George Osborne will use his Mansion House speech on Thursday to give City regulators the power to cap risky mortgage loans in a bid to allay fears of a growing housing bubble. In a dramatic move, the chancellor plans to allow the Bank of England to limit mortgage loans that could undermine the financial stability of the UK housing market.
Osborne to give regulators power to cap mortgage loans | Business | theguardian.com
This is a much better approach than to jack up interest rates in times when there is a world savings glut and we are in times of secular stagnation where supply exceeds demand.
We argued in favor of a more targeted approach to asset bubbles in general, and housing bubbles in particular, and showed the difference in practice:
There are two countries which provide something of an interesting experiment, Sweden and Norway. Sweden went the "hard money" way and increased interest rates, first to prevent inflation, but mostly in order to stop house prices from rising further. This under strong protest from its deputy governor Lars Svensson, a leading expert on deflation.
Well, Swedish inflation has now turned negative; that is, the country is in deflation. This is actually remarkable as Sweden isn't a member of the euro, so it can set its own monetary (and fiscal) policy. It's even more remarkable as when policy started tightening, inflation wasn't really a problem anyway.
One could, like Norway has done, curtail mortgage lending by other means than raising interest rates. In the case of Norway, the central bank:
cut the loan-to-value ceiling on mortgages from 90pc to 85pc. It forced the banks to raise to capital buffers further. The Norges Bank has recommended a 1pc counter-cyclical buffer based on its view of what constitutes a safe level of credit growth. [The Telegraph]
These measures basically stopped Norway's house price boom in its tracks
Voilà, it isn't so hard..
