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House price collapses: policy responses and lessons learned

Maitland MacFarlan

This paper was produced by Maitland MacFarlan, a contractor to the Reserve Bank of New Zealand, as part of the Bank’s general consideration of risks around housing markets.

This article considers several episodes of house price collapses around the globe over the past 30 years, a period that encompasses the Nordic financial crises that began in the late 1980s, the Asian financial crisis of the late 1990s, and the more recent global financial crisis (GFC). I focus on the policy responses to these problems and lessons that current policy makers can derive from these experiences.

The paper does not seek to cover the factors that may have contributed to property price booms in the first place, nor the full range of consequences of the bust – except to the extent that addressing these influences may form part of the policy response. More general assessments of the causes and implications of property market cycles, including in the New Zealand context, can be found elsewhere.1

Not all housing busts lead to or coincide with a more generalised financial crisis, and not all financial crises are accompanied by house price collapses. For example, Hong Kong and Singapore had property price busts in the late 1990s without these leading to the depth of financial crisis seen elsewhere in the region at that time. Conversely, house prices in Germany were relatively stable through the GFC period. As discussed below, however, housing downturns and financial crises do often go together. It is therefore difficult at times to distinguish policy responses to a housing bust from responses to a wider financial crisis. Hence, while this paper focuses as far as possible on housing market issues, much of the discussion on responses and lessons has broader scope than this market alone.

1 See, for example, Reinhart and Rogoff (2009), Thornley (2016) and various issues of the BIS Annual Report.