housing boom Archives - the patient investor

Ambrose Evans-Pritchard reports the resounding success of Norway’s central bank in using macroprudential tools to take the steam out of a housing bubble:

if the Bank [BOE] wishes to contain credit, it should learn from Norway’s success. Instead of raising rates, it has used “macroprudential” tools. It 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.

Contrary to claims that these tools never work, they worked splendidly, as you can see from this chart today from HSBC’s David Bloom.

The RBNZ adopted similar measures and it is puzzling why the RBA, which faces an equal threat, is not doing the same.

The 3 big reasons the Fed had gotten it wrong:

Misunderstanding of the housing boom. Staff analysis of the increase in house prices did not find convincing evidence of overvaluation (see, for example, McCarthy and Peach [2004] and Himmelberg, Mayer, and Sinai [2005]). Thus, we downplayed the risk of a substantial fall in house prices. A robust approach would have put the bar much lower than convincing evidence.
A lack of analysis of the rapid growth of new forms of mortgage finance. Here the reliance on the assumption of efficient markets appears to have dulled our awareness of many of the risks building in financial markets in 2005-07. However, a March 2008 New York Fed staff report by Ashcraft and Schuermann provided a detailed analysis of how incentives were misaligned throughout the securitization process of subprime mortgages–meaning that the market was not functioning efficiently.
Insufficient weight given to the powerful adverse feedback loops between the financial system and the real economy. Despite a good understanding of the risk of a financial crisis from mid-2007 onward, we were unable to fully connect the dots to real activity until 2008. Eventually, by building on the insights of Adrian and Shin (2008), we gained a better grasp of the power of these feedback loops.

[The author of the NY Fed report] then added that perhaps the biggest reason for the failure was “complacency,” with which I heartily concur, but to which I would also add hubris and stupidity.

via NY Fed Issues Mea Culpa That Nobody Saw at 6PM on Black Friday | ZeroHedge.

Tag: housing boom

Norway teaches Britain how to choke house booms without killing economy – Telegraph Blogs

NY Fed Issues Mea Culpa That Nobody Saw at 6PM on Black Friday | ZeroHedge