PHILIPP HARTMANN Real Estate Markets and Macroprudential Policy in Europe Boom-bust cycles in real estate markets have been major factors in systemic financial crises and therefore need to be at the forefront of macroprudential policy. The geographically differentiated nature of real estate market fluc- tuations implies that these policies need to be granular across regions and countries. Before the financial crisis that started in 2007 property markets were overvalued in a range of European countries, but much like in other constituencies active policies addressing this were an exception. An increas- ing number of studies suggest that borrower-based regulatory policies, such as reductions in loan-to-value or debt-to-income limits, can be effective in leaning against real estate booms. But many of the new macroprudential policy authorities in Europe do not have clear powers to determine them. Moreover, the cross-border spillovers they may give rise to suggest the es- tablishment of a well-defined macroprudential coordination mechanism for the single European market. JEL codes: E5, G01, G17, G28, R39 Keywords: real estate markets, macroprudential policy, systemic risk, financial crises, bubbles, financial regulation, financial stability indicators. 1. THE ROLE OF REAL ESTATE MARKETS IN SYSTEMIC FINANCIAL CRISES E CONOMIC HISTORY SUGGESTS that some of the most severe systemic financial crises have been associated with boom–bust cycles in real estate The author would like to thank Stefano Corradin, Frank Dierick, Evangelia Rentzou, and Bal´asz Zs´ambokai for support in preparing this note, and Stefano Corradin, Bob DeYoung (the editor), and Evangalia Rentzou for comments. Luca Baldo and Alessandro Parrini provided proficient research assis- tance. The views expressed are only the author’s own and should not necessarily be regarded as views of the ECB or the Eurosystem. P HILIPP H ARTMANN is the Acting Director General Research at the European Central Bank and a chaired part-time Professor for Macro-financial Economics at Erasmus University Rotterdam ( E-mail: [email protected]). Received November 5, 2014; and accepted in revised form November 5, 2014. Journal of Money, Credit and Banking, Supplement to Vol. 47, No. 1 (March–April 2015) C 2015 European Central Bank
70 : MONEY, CREDIT AND BANKING markets (e.g., Bordo and Jeanne 2002, Reinhart and Rogoff 2008, Crowe et al. 2013). 1 Prominent examples include the Nordic and Japanese banking crises as well as the Asian financial crisis of the 1990s. The financial crisis that started in 2007 was not exceptional in this regard, but rather confirmed a historical regularity. 2 Interestingly, the deep underlying sources of this “stylized fact” are not well researched. A first step for understanding this fact is a clear definition of systemic risk. When I developed my preferred definition of this risk I tried to be quite general, build on the full body of available literature, and at the same time allow for its operational use in policy. The resulting definition refers to the risk that financial
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