When is macroprudential policy effective?

BIS paper here.


Previous studies have shown that limits on loan-to-value (LTV) and debt-to-income (DTI) ratios can stabilise the housing market, and that tightening these limits tends to be more effective than loosening them. This paper examines whether the relative effectiveness of tightening vs. loosening macroprudential measures depends on where in the housing cycle they are implemented. I find that tightening measures have greater effects when credit is expanding quickly and when house prices are high relative to income. Loosening measures seem to have smaller effects than tightening, but the difference is negligible in downturns. Loosening being found to have small effects is consistent with where it occurs in the cycle.

15 replies on “When is macroprudential policy effective?”

@seafoid — Actually, Ireland is now in a growth phase, not a recession, so macroprudential controls are very relevant. To continue your metaphor, the Irish horse is safely in his box, and we need to keep him there.

That ain’t a ‘horse’; ’tis a gennet!

Wonder what sort of progeny it will produce?

Can we elect them to the Senate?

Jury remains out for a while on The Guv’nor’s timing.

@ Gregory

The global macro situation is not looking good at all.

How long do you think the growth phase will last if Janet can’t get wage growth going ?

Dublin house prices are a bit like the SnP500 – great recovery from March 09 but Grand old Duke of York risk all the same.

Central Banking has zero influence at rate zero and is touting Macropru as the dog’s nuts but historic evidence suggests it isn’t as safe as normal interest rates would be. At least they could be reduced if volatility came back. They might discourage excessive risk taking too.


“It is clearly important to build a more resilient financial system, through higher capital standards and aggressive macroprudential policies.
None of this is going to be easy. A chapter in the companion Global Financial Stability Report brings out, for example, the potential drawbacks of the unconventional policies that central banks were driven to use once interest rates became close to zero. While changing inflation targets would be extremely risky, what has happened suggests that somewhat higher inflation might have been helpful. Experience certainly indicates that monetary policy is not all that effective, on its own, during a balance-sheet recession. It must be complemented by fast reconstruction of the financial system, accelerated private sector deleveraging and a willingness to employ the fiscal balance sheet to support demand, wherever feasible.”

Deleveraging has barely started. And that article was written in 2013 before deflation appeared at the feast.

Macropru is the best we can do at the zero bound, in fairness.

But it can’t address how people think . And for me this is the big risk. How do we change the meme that this time is different?

David McWilliams at the banking inquiry said everyone knew the Tiger was nuts or something similar. But why wasn’t anything done? Who ensured nothing was done ?


“everyone expected a soft landing”


“In the US, there is currently little dispersion among professional economists around the future path of US GDP. This “clarity” has historically been linked to lower levels
of market volatility.”

Why is it so hard to articulate the dangers of unjustified optimism and respond coherently ?

Answers on a postcard.

Think of the blind. Think of what radio means to them.

“Previous studies have shown that limits on loan-to-value (LTV) and debt-to-income (DTI) ratios can stabilise the housing market, and that tightening these limits tends to be more effective than loosening them.”

This is arse-about-face. “Its “affordability”, silly.”

Like, home purchaser’s have to have a reliable income source, and they are not induced to committ more than 32% of that income on all and every expense and cost of maintaining a residential mortgage, insuring their property, paying property taxes and setting aside some savings to guard against an unlikely (non-zero probability) emergency. Stuff happens!

Classify, define or structure ‘affordability’ as you will, but that’s the real constraint. Seems to have been forgotten about and we have ended up in the residential cul-de-sac known as Sh*tsville.

The macroprudential policies are sensible and protect both the banks and the borrowers. It’s also worth thinking about the structure of supply side and tax policies, although that is indeed outside the scope of this current piece of work.

For instance, it’s interesting to observe that new house construction in Ireland attracts the costs of both VAT and development levies. The borrowing that macroprudential policies aim to limit includes young families taking out mortgages to pay taxes. It’s an odd set of societal priorities.

Why, for instance, is there no VAT on rent? Allow me a slightly cynical thought… That the price response to spending borrowed money is less than the price response to spending from truly current monies.

VAT on new houses paid for with mortgages allows the state to extract money from young families without overly reducing the monies available to the property industry, landowners, and existing property owners, particularly since there’s no VAT on sales of older houses. It’s almost a subsidy to people selling existing houses and doesn’t too much damage the property industry since people can borrow to pay the excess costs and notice it less (the central bank apparently even has to stop them borrowing too much).

Whereas VAT on rent would more directly reduce the money available to landlords since top line rents would be unlikely to increase much or at all.

Govt policy is deliberately aimed at something other than making housing readily available and affordable.

@ HS

“Govt policy is deliberately aimed at something other than making housing readily available and affordable.”

It’s aimed at keeping defaults low and saving bank capital. Once house prices went up they couldn’t really go back to normal again. That is the problem with financialisation.

On the VAT question in relation to rents, it seems that the Revenue Commissioners are on the case.


One assumes that there is no political impetus to add VAT to the cost of rents because of the dysfunctional nature of housing policy in Ireland which the consultation paper on the taxing of development land is designed to correct; but hardly before the next election!

The objective should be easily stated i.e. an adequate supply of good quality housing for (i) those that can afford to buy (LTV and LTI) (ii) for those who wish to rent (either because they choose to do so or cannot afford to buy) and (iii) subsidised for those incapable of doing either, preferably on the basis of state-funded social housing or state-supported cooperative housing associations.

What we have is a mishmash of measures based fundamentally on the belief that the supply of housing is a trade-able item like any other with prices set to whatever the market will bear. This includes hoarding development land in order to push them up. We like it that way!

As the Irish exemption of rents from VAT seems to be based on EU law that provides for VAT on lettings being exempt (although with some opt-in provisions for those with scope to reclaim VAT), one assumes that it has nothing to do with the dysfunctionality of Irish housing policy.

@Hugh Sheehy

Excellent perspective on VAT on new houses, but none on second hand houses or on rent.
There is no question but the tax is designed to reward “property industry, landowners, and existing property owners”.

We have had, in the recent past, a lobby to remove the zero rate of vat on fresh meat, milk vegetables but not even a squeak about removing the exemption for vat on residential rents. Probably about 450 million per year.

Must be tough working on macroprudential policy without a variable termed ‘POWER’.

re:”dysfunctionality of Irish housing policy”


“The Department of the Environment’s estimate for new homes built here last year is based on the number of homes that connected for electricity ”

That says all that needs to be said of the dysfunctionality on Irish housing policy.

re: VAT

Having done a little research, I will come back to the issue but have no reason to change my opinion that VAT on housing and letting is developer / landlord friendly.

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