MPC member Posen considers house price stabilisers
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Monetary Policy Committee’s newest member Adam Posen says the creation of a house price stabilisation mechanism could help stop future boom and bust cycles.
Speaking at the MPR Monetary Policy and Markets conference in London today, Posen suggested that the creation of complementary policy alongside changes to real estate taxes and regulation could provide a counter-cyclical element – or automatic stabilisers – to structures already in place in many countries’ housing markets.
He said: “Real estate bubbles tend to have much higher real economic costs than equity bubbles, perhaps because they involve illiquid collateral and local spill over effects.”
While other asset bubbles may impossible to control wstabilisersith monetary policy with the limited powers the central bank currently possesses, Posen said housing bubbles are possibly the easiest to control and the most affective to contain.
While Posen is in favour of the Financial Stability Board’s proposals to demand more capital of financial institutions during boom periods as a means of dampening boom and bust cycles, he argues that this may be enough - he cited the current downturn in Spain, which adopts counter-cyclical measures, as a case in point.
He says that any future stabiliser would have to be made of modest proposals, without any large implications for tax revenue over the cycle.
Posen used the examples of the Bank of Japan in 1992 and the Reserve Bank of Australia in 2003, which both effectively ‘popped’ housing bubbles to calm their economies by putting caps on real estate lending.
He says: “If we can contemplate a Tobin tax on financial transactions, we should be able to set up something in a similar spirit for real estate transactions which are already taxed and regulated. This should be in no way constraining on fiscal policy decisions over the medium-term. But it would mean having already existing title fees, capital gains taxes, stamp and transfer taxes, varying over time in line with price developments in the housing market more broadly.
“The point is to consider changing the incentives and leaning against the wind in the real estate market directly, rather than just at one remove via the banks, or taking on the economy as a whole via monetary policy.”
Posen also said that stabilisers could also improve affordability for borrowers and would reduce the short-terist speculators looking to invest and subsequently over-inflate property prices.
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