2017-05-11
Preparations for combating housing price bubbles are necessary and, in fact, must be made in advance, taking preventative measures to hinder their inflation and thus mitigating a negative outcome. The international high-level conference organised by the Bank of Lithuania provides more insight into the central banks’ retaliation against the heating real estate markets.
‘Harsh lessons from past crises show that housing price bubbles come at too high a cost for the economy and the people, thus we cannot make the same mistake twice. The conference focuses on the experience of the most advanced countries and the solutions that they put forward, which allow timely identification of housing price bubbles and taking measures to prevent them,’ said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania.
In Lithuania, housing is the most valuable asset that a resident owns; its value significantly exceeds that of deposits, other savings and financial assets. In addition, activities related to real estate comprises a significant share of the country’s GDP. Experience has shown that when a real estate price bubble bursts, residents cut their consumption, unemployment increases, construction and other related sectors are hit by substantial losses, while the entire domestic economy has to bear the consequences. The negative impact is exacerbated by unsustainable housing loan expansion and a high level of resident indebtedness. Irresponsible lending in particular was one of the major drivers of a spike in housing prices, recorded a decade ago, as well as the crisis that hit right after.
‘Lithuania is one of the first in Europe to have learnt from the lessons of the crisis – since 2011 it has already been applying financial stability enhancing measures, i.e. the Responsible Lending Regulations. Nonetheless we have to continue closely monitoring the developments in the real estate market and take necessary actions should the market start over-heating. Real estate-related crises are longer and more severe than others, hence the belief that macroprudential policy should step up its response to the formation of the real estate price bubbles becomes stronger,’ said Tomas Garbaravičius, Member of the Board of the Bank of Lithuania.
To illustrate his point, Mr Garbaravičius turned to Denmark and Norway and their recent policy decision to apply measures targeted at cooling down crediting of residential mortgages and prices in the most-overheating cities. These are firstly capitals, whose real estate market, due to their size, distinctiveness and importance, is usually active and needs special attention.
According to Mr Garbaravičius, applying macroprudential tools is not the only way to ensure sustainable development. It is necessary to take into account, consider and assess other measures that have significant implications for developments in the real estate market, for example, various construction limitations, reducing housing supply, as well as fiscal policy which sometimes may have an even greater impact on housing prices.
Keynote speeches will be given by Stefan Ingves, Governor of Sveriges Riksbank, and Jon Danielsson, Director at the LSE Systemic Risk Centre. The conference brings together high-level policy makers from the Bank of Lithuania, European Central Bank, IMF, and the central banks of Poland, France, Sweden, Germany and other countries, as well as top researchers and experts from leading financial and academic institutions who will share their insights and experience. It hosts more than 40 representatives from around the world.
The live broadcast of the conference is available online. For speeches and presentations, visit the Bank of Lithuania website.