## Executive Summary (mphpeea)

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### Overview
- Increasing use of macroprudential policies (MaPPs) in Europe following the global financial crisis (GFC).
- Objective: limit systemic risk, defined as the risk of widespread disruption to the provision of financial services caused by impairment of all or parts of the financial system with serious negative consequences for the real economy.
- Sample of European economies analyzed: Bulgaria, Czech Republic, Denmark, Estonia, Hungary, Iceland, Israel, Latvia, Lithuania, Norway, the Slovak Republic, Sweden, and Switzerland.

### Key findings on effectiveness
- MaPP implementation successfully limited systemic risk emerging from riskier mortgages and helped to build resilience.
- Many country experiences have not yet spanned a full financial cycle; lessons and empirical evidence remain tentative.
- Borrower-based measures, supported by lender-based measures, helped limit the share of riskier mortgages.
- Results mixed on containing house prices and overall credit growth amid still-accommodative monetary policy and other factors.
- MaPPs mainly aim at strengthening resilience and containing systemic financial risks, rather than steering house prices and overall credit growth.
- Wide heterogeneity in institutional arrangements and policies; no one-size-fits-all approach.

### Drivers of house prices and MaPP implications
- Drivers: demand (growing household incomes and wealth, rising population, migration, lower interest rates, availability of credit), supply, policy, structural factors (supply responsiveness, tax incentives for home ownership and debt financing, rental market regulations).
- Accommodative monetary policy is expected to be removed slowly; low interest rates likely to remain an important driver of high house prices for some time.
- MaPPs reduce housing price growth via reduced demand because MaPPs make some mortgages more expensive.
- MaPPs may prevent some households from becoming homeowners; exemptions for first-time buyers can contain adverse effects on housing affordability.
- Effects may be especially strong on lower-income households; policymakers need to balance financial stability and housing affordability.

### MaPP adoption and instruments (as of July 2018)
- LTV caps: 19 European countries have LTV caps ranging from 35 to 100 percent, most between 60 to 95 percent.
- DSTI and DTI/LTI caps: 15 countries have imposed either DTI/LTI or DSTI caps (except Slovakia, which adopted both LTI and DSTI).
  - DSTI caps vary by borrowers’ income level (Czech Republic, Hungary, Poland, Portugal, Slovakia, Slovenia), loan currency (Cyprus, Hungary), LTV ratio (Lithuania), or interest fixation period/debt serving frequency (Hungary, Slovakia).
  - Romania’s DSTI caps are determined by scenario analysis that considers currency, interest rate, and income risks.
  - DTI (Norway) or LTI (Czech Republic, Ireland, Slovakia, UK) caps calibrated between 3.5 (Ireland) to 8 (Czech Republic, Slovakia) with exemption limits ranging from 8 (Oslo, Norway) to 20 (Ireland, Slovakia) percent of newly approved loans.
- Capital requirements:
  - 16 out of 32 countries have adopted the full capital conservation buffer of 2.5 percent of risk-weighted asset; others phasing in step-by-step.
  - All countries introduced the countercyclical capital buffer (CCB); only the Czech Republic, Iceland, Norway, Slovakia, Sweden, Switzerland, Lithuania, and UK have non-zero buffers of 0.5 to 2 percent.
  - Systemically important banks are subject to additional measures.

### Implementation challenges
- Adequacy and effectiveness of recently adopted measures are challenging to assess.
- Discussions ongoing on intermediate objectives of MaPPs, assessment of effectiveness, and the extent to which circumvention and policy spillovers can weaken impacts.
- Cross-border and cross-sector spillovers and leakages are important, particularly in closely integrated economies.

### Policy orientation
- MaPPs are primarily tools to enhance financial stability by limiting risky lending and building resilience in bank balance sheets.
- Capital-based tools that build buffers during upturns can support a softer credit contraction during downturns.
- To balance financial stability and housing affordability, MaPP design can incorporate targeted exemptions (for example, first-time buyers) and be coordinated with housing policies that expand supply and improve affordability.

*IMF Departmental Paper — Executive Summary*

### 1. Use of LTV and DTI

#### Summary of borrower- and lender-based measures
- Lender-based examples: capital conservation buffer (CB) at 2.5 percent, countercyclical capital buffer (CCB), systemic risk buffer (SRB) with country-specific settings.
- Borrower-based measures: LTV caps, DTI/LTI or DSTI/PTI limits, amortization requirements, maximum maturities.
- Some countries combine borrower-based measures with higher capital and risk-weight requirements and liquidity constraints.

#### Case-study outcomes on riskier mortgages (selected countries)
- Czech Republic
  - Measures: CB at 2.5 percent, CCB at 1 percent, SRB within 1–3 percent; tightening of recommended maximum LTV in Q1 2017.
  - Outcome: Clear decline in share of new mortgages with LTVs above 80 percent; increase in those with LTV between 70 and 80 percent. Debt-servicing and loan-to-income ratios did not show meaningful improvement.
- Denmark
  - Measures: Restrictions on borrowing capacity since 2014; consumer protection clause in 2015 requiring at least 5 percent down payment (95 percent maximum LTV); 2017 guidelines promoting higher share of fixed-rate mortgages.
  - Outcome: Share of new mortgages with LTV above 95 percent declined markedly; mortgages with LTV between 80 and 90 percent declined slightly.
- Hungary
  - Measures: From March 2010 maximum LTV ratios of 75/60/45 percent for domestic currency/euros/other currencies; adjusted since to 80/50/35 percent; PTI ratios and MFAR introduced; consumer-friendly certified loans from 2017.
  - PTI ratios: For borrowers with net monthly income below HUF 400,000 (about €1,250), PTI ratios are 50/25/10 percent; for higher-income borrowers, ratios are 60/30/15 percent. Effective October 2018 PTI modified; further tightened from July 2019.
  - Outcome: Share of new housing loans with LTV over 70 percent more than halved, to about 30 percent in H1 2017.
- Israel
  - Measures: LTV caps in November 2012 (75 percent for first-time buyers; 50 percent for investment property); risk-weight increases in March 2013 (to 50 percent for LTV 45–60 percent; to 75 percent for LTV above 60 percent).
  - Outcome: Proportion of new mortgages with LTV >75 percent declined from 6 percent in October 2012 to 0.5 percent by February 2014; mortgages with LTV between 60 and 75 percent also declined modestly, with a significant drop in 2016 likely due to 2015 regulatory requirements and fiscal measures.
- Norway
  - Measures: Higher capital and liquidity requirements (CB, CCB, SRB, domestically systemic important institution buffers, and leverage ratio) in 2013–17; borrower-based LTV, DTI, and amortization requirements.
  - Outcome: Share of new loans with LTV above 85 percent declined after LTV cap. DTI measure effective from start of 2017 reduced share of new mortgages with DTI of more than 500 from 9 percent in 2016 to 2 percent in 2017.
- Slovakia
  - Measures: LTV measures since 2014 and CCB set to 0.5 percent.
  - Outcome: Share of new loans with LTV >90 percent fell to below 20 percent by Q2 2015 and to 6.3 percent by Q3 2016; share with LTV 80–90 percent initially rose but then declined noticeably.
- Sweden
  - Measures: Mortgage cap in 2010 (new loans not to exceed 85 percent of home value); amortization requirements later.
  - Outcome: Share of high-LTV mortgages declined. Difference-in-difference analysis: households limited by the mortgage cap borrowed approximately 13 percent less and purchased homes approximately 10 percent less than otherwise; greatest effect outside metropolitan regions.
- Switzerland
  - Measures: Risk weights raised for mortgage portion in excess of 80 percent LTV in early 2013; activated CCB in 2013 at 1 percent, raised to 2 percent in 2014.
  - Outcome: Proportion of new mortgages with LTV >80 percent declined by about 5 percentage points in 2013. Capital-constrained or mortgage-intensive banks raised mortgage rates and new mortgage loans shifted to better-capitalized institutions.

#### Aggregate assessment: riskier mortgages vs house prices and credit growth
- Borrower-based MaPPs targeted to the residential mortgage market generally helped curb growth of riskier mortgages (before-after comparisons).
- Impact on house prices and overall credit growth was mixed:
  - Switzerland: real estate price growth and mortgage lending gradually eased after measures.
  - Czech Republic, Hungary, Slovak Republic: house prices continued to grow rapidly after MaPPs, though measures may have contained faster increases.
  - Israel: house prices continued to rise due to low interest rates and housing supply constraints; deceleration since 2016 linked to fiscal measures, mortgage rate rises tied to capital surcharges, and Buyer’s Price program uncertainty.
  - Norway and Sweden: impact on house prices appears limited or transitory despite dampening of credit growth.
- Model-based evidence: Controlling for macroeconomic environment, MaPPs contributed to containing credit growth in Norway and Sweden. Sweden’s mandatory amortization requirement in 2016 encouraged households to borrow less and buy less-expensive houses.
- Caveat: Full evaluation requires completion of a full economic cycle. Circumvention of measures has been observed and needs to be addressed.

#### Design and implementation features
- SRB applied differentiated by systemic importance or exposures in several countries (examples: Austria, Croatia, Czech Republic, Denmark, Hungary, Iceland, Lithuania).
- Sectoral risk-weight floors applied to commercial real estate in several countries (Croatia, Finland, Ireland, Norway, Romania, Sweden, UK) and to residential mortgages in others (Belgium, Croatia, Luxembourg, Norway, Slovenia, Sweden).
- Variations in buffer application: Bulgaria, Estonia, the Netherlands, Norway, Romania, Slovakia, and Sweden apply one buffer to all banks; Hungary varies SRB by institution’s exposure to commercial real estate loans.
- In the UK, PRA set criteria based on EU law making it harder to use a preferential 50 percent risk weight for CRE exposures.

*Source: mphpeea - 1. Use of LTV and DTI*

### 3. Israel: House Prices and Housing Loans

#### Trends and comparative observations
- Israel cited where taxation of empty houses and other levies to discourage investment purchases could curb house price appreciation.
- Israel among countries with one of the highest increases in valuation metrics since 2010: “an increase of about 28 percent, on average, since 2010.”
- Israel among countries with large increases in price-to-rent ratios: “an increase of 31 percent, on average, since 2010.”

#### Effectiveness of MaPPs and interpretation
- MaPPs had a lasting moderating effect on the level of household debt; “real estate price growth and lending have eased progressively.”
- Counterfactual analysis (Norway and Sweden) findings:
  - Household credit growth would have been higher without the measures, but statistical significance is borderline.
  - Actual credit growth paths remain below counterfactuals in both cases; difference statistically significant at the 95 percent confidence level in Norway starting several quarters after MaPPs introduction.
  - In Sweden, actual credit growth is close to—but still within—the lower bound of the confidence interval.
  - For house prices: counterfactuals are above actual values in Sweden, but not significantly so. In Norway, the difference is positive only in 2017 and the estimated confidence interval is very large.
  - Caveat: Results suggest some effect on household credit but should be interpreted with care due to short post-implementation time and empirical identification challenges.

#### Circumvention risks and policy implications
- Nonbank circumvention:
  - Evidence that MaPPs on banks were partly circumvented by nonbanks where nonbanks face less-stringent regulation (examples: Bulgaria, Romania, Croatia).
  - Empirical studies find substitution toward nonbanks following MaPPs on banks.
  - Responses include broadening regulatory parameters to cover nonbanks, capturing funding of leasing companies within credit limits, and closer cooperation with nonbank supervisors.
  - Gaps remain: LTV limits do not include nonbanks in some European countries (European Systemic Risk Board 2016).
- Cross-border circumvention:
  - Cross-border borrowing from foreign banks reduced effectiveness of domestic MaPPs in several cases (Estonia, Bulgaria, Croatia, Poland).
  - Empirical literature: macroprudential tightening associated with lower domestic credit but often with higher cross-border borrowing.
  - Historical magnitudes: “Cross-border bank loans to Central Europe rose from about 10 to 30 percent of GDP from 2002 to 2008, while those to Southeastern Europe rose from about 10 to 80 percent of their GDP (Annex I, Kang and others 2017).”
  - Policy responses: extend measures to foreign providers, reciprocity arrangements, host control, capital flow management measures.
  - Reciprocity:
    - Reciprocity is a cornerstone of the Basel-III agreement on the CCB (BCBS 2010).
    - A buffer activated in one country requires supervisors in all countries to apply the same buffer on their banks’ exposures into the host country “as long as the buffer does not exceed 2.5 percent of risk-weighted assets.”
    - In the EU, CRR/CRD IV mandates automatic reciprocity for the CCB and provides for reciprocity arrangements for other measures (voluntary for LTV and DTI limits).
    - ESRB recommended reciprocation for certain measures (Belgium, Estonia) and recommended reciprocation for renewed measures in other countries.

#### Interactions with taxation and structural housing policies
- Mortgage interest deductibility and subsidies:
  - Subsidies and preferential mortgage interest deductions provide incentives to take on private debt to buy property.
  - European Commission notes deductibility of mortgage interest “may…encourage household indebtedness, contribute to higher house prices and lead to an increased risk of financial instability.”
  - Some countries reduced or eliminated mortgage interest deductibility (examples: Denmark and Finland reducing; Croatia eliminated in 2010; Ireland, Spain, United Kingdom in process of phasing out).
- Shift toward recurrent property taxes:
  - For a sample of 30 European countries, share of immovable property taxes relative to total tax revenues rose from “1.9 percent in 2005 to 2.6 percent in 2015.”
  - For EU-28 the share rose from “3.3 percent to 4.3 percent.”
  - Recurrent property taxes cited as “among the least detrimental to economic growth, and could impact house prices.”
  - Example: Denmark’s upcoming property tax increases (and land reforms) expected to “reduce house price levels and volatility.”
- Other structural policies:
  - Constraints on second-home purchase, restrictions on foreign ownership, rent controls, land use policies, zoning restrictions, and building codes can dampen house prices by reducing supply elasticity.
  - Policies that develop mortgage markets (including direct government participation) can exacerbate credit cycles.

#### Trade-offs and policy options to protect affordability
- MaPPs can improve or worsen housing affordability:
  - If MaPPs reduce housing price growth, affordability can improve.
  - Price reductions occur via demand contraction as MaPPs make some mortgages more expensive; MaPPs can prevent some households from becoming homeowners.
  - Effects may be especially strong on lower-income households relying on high LTV/high DTI mortgages.
- Policy measures to protect affordability without compromising financial stability:
  - Strengthen housing affordability policies, including:
    - homeownership subsidies,
    - housing allowances,
    - social rental housing,
    - rental support and regulation.
  - Classification of subsidies: supply-side vs demand-side interventions.

*Source: mphpeea - 3. Israel: House Prices and Housing Loans*

### 1. Price-to-Income Ratio

#### Indicators and observations
- Price-to-Income Ratio (Index, 2010 = 100).
- Price-to-Income Ratio Percentile, 2017:Q3 or Latest Available (100 = highest in history; 0 = lowest in history).
- Price-to-Rent Ratio (Index, 2010 = 100).
- Price-to-Rent Ratio Percentile, 2017:Q3 or Latest Available (100 = highest in history; 0 = lowest in history).

#### Public spending and social rental housing (selected figures)
- Public spending on housing allowances in 2015:
  - Highest in the UK at 1.4 percent of GDP, followed by France and Finland.
  - Denmark, Germany, the Netherlands, and Sweden: about 0.5 percent of GDP.
  - Austria, Bulgaria, Croatia, Czech Republic, and Ireland: between 0.1 and 0.3 percent of GDP.
  - No housing allowance programs reported for Romania, the Slovak Republic, and Slovenia.
- Social rental sector shares:
  - Less than 4 percent of total dwelling stock in Estonia, Hungary, Latvia, Portugal, and Switzerland.
  - Between 4 and 6 percent in Germany and Norway.
  - Intermediate-size sector in Czech Republic, Finland, and the UK.
  - Relatively large sector in Austria, Denmark, and the Netherlands.
  - No social rental housing reported in Croatia, Cyprus, Greece, Sweden, and Turkey (OECD Affordable Housing Database).

#### Tax deductions and MaPP objectives
- Mortgage interest tax deductions widespread; tend to be poorly targeted and not always means-tested or restricted to first-time buyers.
- MaPP objectives in Europe:
  1. increase resilience of the financial system to aggregate shocks by building and releasing buffers;
  2. contain buildup of systemic vulnerabilities by reducing procyclical feedback between asset prices and credit and containing unsustainable increases in household debt;
  3. control structural vulnerabilities within the financial system that emerge through interlinkages, mostly from exposures to the housing markets.
- Common measures: borrower-side (LTVs, DTIs/LTIs, stepped-up amortization) and bank capital requirements (CCBs, SRBs, SIFI buffers, risk-weight floors).
- Implementation issues: potential leakages and circumvention (nonbanks, internationally financed loans); borrower-based measures not always applied to all loan types.

#### Evidence and conclusions
- Borrower-side measures, supported by lender-based measures, helped limit the share of riskier mortgages, contributing to greater resilience.
- In most countries after MaPP introduction, growth of high-LTV mortgages slowed.
- Uncertainty remains whether MaPPs can contain house-price and credit bubbles while monetary policy remains accommodative.
- Main policy conclusions:
  1. Fundamental drivers of house prices often beyond MaPP scope; other policies (land supply, zoning, tax policy) may be needed.
  2. Against accommodative monetary policy, MaPPs can limit riskier mortgages and strengthen bank balance sheets; their ability to contain bubbles is harder to establish.
  3. Given many drivers of house prices, additional policies (tax policy, mortgage-interest deductibility, zoning, construction, planning) may be needed to contain house-price bubbles, particularly if affordability becomes a concern.

*Source: mphpeea - 1. Price-to-Income Ratio*

### Executive Summary ������������������������������������������������������������������������������������������������������

### Executive Summary

### Overview
- Recent years have seen an increasing use of macroprudential policies (MaPPs) in Europe following the global financial crisis (GFC).
- MaPPs in Europe align with the objective of limiting systemic risk, defined as the risk of widespread disruption to the provision of financial services caused by impairment of all or parts of the financial system with serious negative consequences for the real economy.
- The paper documents developments in riskier mortgages, house prices, and credit related to MaPP adoption and assesses effectiveness across a sample of European economies (Bulgaria, Czech Republic, Denmark, Estonia, Hungary, Iceland, Israel, Latvia, Lithuania, Norway, the Slovak Republic, Sweden, and Switzerland).

### Key findings on effectiveness
- Evidence suggests MaPP implementation successfully limited systemic risk emerging from riskier mortgages and helped to build resilience.
- Many countries’ experiences have not yet spanned a full financial cycle, so lessons and empirical evidence remain tentative.
- Borrower-based measures, supported by lender-based measures, helped limit the share of riskier mortgages.
- Results are more mixed on the ability of MaPPs to contain house prices and overall credit growth in the presence of still-accommodative monetary policy and other factors.
- The findings support the notion that MaPPs are mainly aimed at strengthening resilience and containing systemic financial risks, rather than steering house prices and overall credit growth.
- There is wide heterogeneity in institutional arrangements and policies across countries; there is no one-size-fits-all approach.

### Drivers of house prices and implications for MaPP effectiveness
- House prices are driven by demand factors (growing household incomes and wealth, rising population, migration, lower interest rates, availability of credit), supply, policy, and structural factors (supply responsiveness, tax incentives for home ownership and debt financing, rental market regulations).
- Accommodative monetary policy is expected to be removed slowly, implying low interest rates will remain an important driver of high house prices for some time.
- To the extent MaPPs reduce housing price growth, the reduction occurs via a reduction in demand because MaPPs make some mortgages more expensive.
- MaPPs may prevent some households from becoming homeowners; policies can include design features such as exemptions for first-time buyers to contain adverse effects on housing affordability.
- Effects may be especially strong on lower-income households; policymakers need to balance financial stability and housing affordability.

### MaPP adoption and instrument use in Europe
- LTV caps are the most common borrower-based measure. As of July 2018, 19 European countries have LTV caps ranging from 35 to 100 percent, with most between 60 to 95 percent.
- DSTI and DTI/LTI caps: As of July 2018, 15 countries have imposed either DTI/LTI or DSTI caps (except Slovakia, which adopted both LTI and DSTI).
  - DSTI caps vary by borrowers’ income level (Czech Republic, Hungary, Poland, Portugal, Slovakia, Slovenia), loan currency (Cyprus, Hungary), LTV ratio (Lithuania), or interest fixation period/debt serving frequency (Hungary, Slovakia).
  - Romania’s DSTI caps are determined by scenario analysis that considers currency, interest rate, and income risks.
  - DTI (Norway) or LTI (Czech Republic, Ireland, Slovakia, UK) caps are calibrated between 3.5 (Ireland) to 8 (Czech Republic, Slovakia) with exemption limits ranging from 8 (Oslo, Norway) to 20 (Ireland, Slovakia) percent of newly approved loans.
- Capital requirements:
  - 16 out of 32 countries have adopted the full capital conservation buffer of 2.5 percent of risk-weighted asset; others are phasing in step-by-step.
  - All countries have introduced the countercyclical capital buffer, but only the Czech Republic, Iceland, Norway, Slovakia, Sweden, Switzerland, Lithuania, and UK have non-zero buffers of 0.5 to 2 percent.
  - Systemically important banks are subject to additional measures.

### Implementation challenges and circumvention risks
- Implementation of MaPPs is challenging, especially regarding the adequacy and effectiveness of recently adopted measures.
- Ongoing discussions concern intermediate objectives of MaPPs, assessment of effectiveness, and the extent to which circumvention and policy spillovers can weaken impacts.
- Cross-border and cross-sector spillovers and leakages are important considerations, particularly in closely integrated economies.

### Role of MaPPs relative to other policies
- MaPP effectiveness in influencing house prices through credit should be assessed in the context of other policies affecting house prices (land supply, zoning, tax policy, rental market regulation).
- Some measures directly tackle house prices (for example, stamp duties), but MaPPs mainly aim to tackle systemic risk by taming lending practices and/or generating buffers; any price effects are indirect via credit.

### Policy implications and orientation
- MaPPs are primarily tools to enhance financial stability by limiting risky lending and building resilience in bank balance sheets.
- Capital-based tools that build buffers during upturns can support a softer credit contraction during downturns.
- To balance financial stability and housing affordability, MaPP design can incorporate targeted exemptions (for example, first-time buyers) and be coordinated with housing policies that expand supply and improve affordability.

*IMF Departmental Paper — Executive Summary*

### 1. Use of LTV and DTI

### 1. Use of LTV and DTI

### Summary of borrower- and lender-based measures
- Lender-based measures cited include capital conservation buffer (CB) at 2.5 percent, countercyclical capital buffer (CCB), and systemic risk buffer (SRB) with country-specific settings (examples below).
- Borrower-based measures focus on LTV caps, DTI (debt-to-income) or DSTI/PTI (debt-service-/payment-to-income) limits, amortization requirements, and maximum maturities.
- Some countries combined borrower-based measures with higher capital and risk-weight requirements and liquidity constraints.

### Case-study outcomes on riskier mortgages
- Czech Republic
  - Measures: CB at 2.5 percent, CCB at 1 percent, and SRB ranging within 1–3 percent; tightening of maximum recommended LTV in Q1 2017.
  - Outcome: Clear decline in share of new mortgages with LTVs above 80 percent and increase in those with LTV between 70 and 80 percent. Debt-servicing and loan-to-income ratios did not show a meaningful improvement over the period.
- Denmark
  - Measures: Restrictions on borrowing capacity since 2014; consumer protection clause in 2015 requiring at least 5 percent down payment (95 percent maximum LTV); 2017 guidelines on good business practices promoting higher share of fixed-rate mortgages.
  - Outcome: Share of new mortgages with LTV above 95 percent declined markedly; mortgages with LTV between 80 and 90 percent declined slightly.
- Hungary
  - Measures: From March 2010 maximum LTV ratios of 75/60/45 percent for domestic currency/euros/other currencies; adjusted since to 80/50/35 percent; PTI ratios introduced with specific bands; MFAR (mortgage funding adequacy ratio) introduced in April 2017; consumer-friendly certified loans from 2017.
  - PTI ratios: For borrowers with net monthly income below HUF 400,000 (about €1,250), PTI ratios are 50/25/10 percent; for higher-income borrowers, ratios are 60/30/15 percent. Effective October 2018 PTI modified to encourage longer interest rate fixation periods; to be further tightened from July 2019.
  - Outcome: Share of new housing loans with LTV over 70 percent more than halved, to about 30 percent in H1 2017.
- Israel
  - Measures: LTV caps in November 2012 (75 percent for first-time buyers; 50 percent for investment property); risk-weight increases in March 2013 (to 50 percent for LTV 45–60 percent; to 75 percent for LTV above 60 percent).
  - Outcome: Proportion of new mortgages with LTV >75 percent declined from 6 percent in October 2012 to 0.5 percent by February 2014; mortgages with LTV between 60 and 75 percent also declined modestly, with a significant drop in 2016 likely due to 2015 regulatory requirements and fiscal measures.
- Norway
  - Measures: Higher capital and liquidity requirements (CB, CCB, SRB, domestically systemic important institution buffers, and leverage ratio) in 2013–17; borrower-based LTV, DTI, and amortization requirements.
  - Outcome: Share of new loans with LTV above 85 percent declined after LTV cap. DTI measure effective from start of 2017 reduced share of new mortgages with DTI of more than 500 from 9 percent in 2016 to 2   percent in 2017.
- Slovakia
  - Measures: LTV measures since 2014 and CCB set to 0.5 percent.
  - Outcome: Share of new loans with LTV >90 percent fell to below 20 percent by Q2 2015 and to 6.3 percent by Q3 2016; share with LTV 80–90 percent initially rose but then declined noticeably.
- Sweden
  - Measures: Mortgage cap in 2010 (new loans not to exceed 85 percent of home value); amortization requirements later.
  - Outcome: Share of high-LTV mortgages declined. Authorities’ difference-in-difference analysis found households limited by the mortgage cap borrowed approximately 13 percent less and purchased homes approximately 10 percent less than otherwise; greatest effect outside metropolitan regions.
- Switzerland
  - Measures: Risk weights raised for mortgage portion in excess of 80 percent LTV in early 2013; activated CCB in 2013 at 1 percent, raised to 2 percent in 2014.
  - Outcome: Proportion of new mortgages with LTV >80 percent declined by about 5   percentage points in 2013. Capital-constrained or mortgage-intensive banks raised mortgage rates and new mortgage loans shifted to better-capitalized institutions.

### Aggregate assessment: riskier mortgages vs house prices and credit growth
- Finding: Borrower-based MaPPs targeted to the residential mortgage market generally helped curb growth of riskier mortgages (before-after comparisons).
- Finding: Impact on house prices and overall credit growth was mixed across countries:
  - Switzerland: real estate price growth and mortgage lending gradually eased after measures.
  - Czech Republic, Hungary, Slovak Republic: house prices continued to grow rapidly after MaPPs, though measures may have contained faster increases.
  - Israel: house prices continued to rise due to low interest rates and housing supply constraints; deceleration since 2016 linked to fiscal measures, mortgage rate rises tied to capital surcharges, and Buyer’s Price program uncertainty.
  - Norway and Sweden: impact on house prices appears limited or transitory despite dampening of credit growth.
- Model-based evidence: Controlling for macroeconomic environment, macroprudential measures appeared to contribute to containing credit growth in Norway and Sweden. A difference-in-difference approach suggests Sweden’s mandatory amortization requirement in 2016 encouraged households to borrow less and buy less-expensive houses.
- Caveat: A full evaluation requires completion of a full economic cycle. Circumvention of measures has been observed and needs to be addressed (see Chapter 5).

### Implementation notes and cross-country design features
- Some countries applied SRB differentiated by systemic importance or exposures; examples include Austria, Croatia, Czech Republic, Denmark, Hungary, Iceland, Lithuania.
- Sectoral risk-weight floors were applied to commercial real estate in several countries (Croatia, Finland, Ireland, Norway, Romania, Sweden, UK) and to residential mortgages in others (Belgium, Croatia, Luxembourg, Norway, Slovenia, Sweden).
- Variations in buffer application: Bulgaria, Estonia, the Netherlands, Norway, Romania, Slovakia, and Sweden apply one buffer to all banks; Hungary varies SRB by institution’s exposure to commercial real estate loans.
- In the UK, the Prudential Regulation Authority set criteria based on EU law that make it harder to use a preferential 50 percent risk weight for CRE exposures; firms not meeting criteria must apply the default risk weight for CRE.

*Source: mphpeea - 1. Use of LTV and DTI*

### 3. Israel: House Prices and Housing Loans

### 3. Israel: House Prices and Housing Loans

### Trends and comparative observations
- Charted data present year-over-year percent change in house prices and housing loans for Israel (figure heading only).
- Israel is cited as an example where “taxation of empty houses and other levies to discourage purchase for investment purposes (as in Israel) could have a similar effect” to stamp duties on foreigners in curbing house price appreciation.
- Israel is listed among countries with one of the highest increases in valuation metrics since 2010: “the highest increases were observed in countries such as Australia, Austria, Israel, Luxemburg, and Sweden, (an increase of about 28 percent, on average, since 2010).”
- Israel is also listed among countries with large increases in price-to-rent ratios: “The highest increases were observed in countries like Israel, Luxemburg, Norway, and Sweden, (an increase of 31 percent, on average, since 2010).”

### Effectiveness of macroprudential policies (MaPPs) and interpretation
- MaPPs have had a lasting moderating effect on the level of household debt, but “real estate price growth and lending have eased progressively.”
- Counterfactual analysis for Norway and Sweden (methodology described) suggests:
  - “The analysis suggests that the household credit growth would have been higher without the measures, but statistical significance is borderline.”
  - “Actual credit growth paths are found to remain below counterfactuals in both cases, with the difference becoming statistically significant at the 95 percent confidence level in Norway starting several quarters after the introduction of MaPPs.”
  - “In Sweden, actual credit growth is close to—but still within—the lower bound of the confidence interval.”
  - For house prices: “Counterfactuals are above actual values in Sweden, but not significantly so. In Norway, the difference is positive only in 2017 and the estimated confidence interval is very large.”
  - Caveats: “While these results are suggestive of some effect on household credit, they should be interpreted with care, bearing in mind the relatively short time since the implementation of some measures and the well-known empirical challenge in isolating the impact of policy changes from that of other intervening factors.”

### Circumvention risks and policy implications
- Circumvention through nonbank channels:
  - Evidence that MaPPs on banks have been partly circumvented by nonbanks where nonbanks face less-stringent regulation; examples cited include Bulgaria, Romania, Croatia.
  - Empirical studies find a substitution effect toward nonbanks following MaPPs on banks.
  - Responses documented include broadening regulatory parameters to cover nonbanks, capturing funding of leasing companies within credit limits, and closer cooperation with nonbank supervisors.
  - Gaps remain: “The scope of LTV limits does not include nonbanks in some European countries (European Systemic Risk Board 2016).”
- Cross-border circumvention:
  - Cross-border borrowing from foreign banks reduced effectiveness of domestic MaPPs in several cases (Estonia, Bulgaria, Croatia, Poland).
  - Empirical literature broadly finds macroprudential tightening is associated with lower domestic credit but often with higher cross-border borrowing.
  - Historical magnitudes: “Cross-border bank loans to Central Europe rose from about 10 to 30 percent of GDP from 2002 to 2008, while those to Southeastern Europe rose from about 10 to 80 percent of their GDP (Annex I, Kang and others 2017).”
  - Policy responses include extending measures to foreign providers of financial services, reciprocity arrangements, host control, and capital flow management measures.
  - Reciprocity details:
    - “Reciprocity is a cornerstone of the Basel-III agreement on the CCB (BCBS 2010).”
    - A buffer activated in one country requires supervisors in all countries to apply the same buffer on their banks’ exposures into the host country “as long as the buffer does not exceed 2.5 percent of risk-weighted assets.”
    - In the EU, CRR/CRD IV mandates automatic reciprocity for the CCB and provides for reciprocity arrangements for other measures (voluntary for LTV and DTI limits).
    - ESRB actions: ESRB recommended reciprocation for certain measures (Belgium, Estonia) and recommended reciprocation for renewed measures in other countries.

### Interactions with housing taxation and structural housing policies
- Taxation and subsidies:
  - Subsidies and preferential mortgage interest deductions are widely used and “provide incentives to take on private debt to buy property.”
  - The European Commission notes deductibility of mortgage interest “may…encourage household indebtedness, contribute to higher house prices and lead to an increased risk of financial instability.”
  - Some countries have reduced or eliminated mortgage interest deductibility (examples: Denmark and Finland reducing; Croatia eliminated in 2010; Ireland, Spain, United Kingdom in process of phasing out).
- Shift toward recurrent property taxes:
  - For a sample of 30 European countries, the share of immovable property taxes relative to total tax revenues rose from “1.9 percent in 2005 to 2.6 percent in 2015.”
  - For EU-28 the share rose from “3.3 percent to 4.3 percent.”
  - Recurrent property taxes are cited as “among the least detrimental to economic growth, and could impact house prices.”
  - Examples: Denmark’s upcoming property tax increases (and land reforms) are expected to “reduce house price levels and volatility.”
- Other structural and supply-side policies:
  - Measures such as constraints to purchase second homes, restrictions to foreign ownership, rent controls, land use policies, zoning restrictions, and building codes can dampen house prices by reducing supply elasticity.
  - Policies that develop mortgage markets (including direct government participation) can exacerbate credit cycles.

### Trade-offs: financial stability versus housing affordability and policy options
- MaPPs can both improve or worsen housing affordability:
  - If MaPPs are effective in reducing housing price growth, they can improve affordability.
  - Price reductions occur via demand contraction as MaPPs make some mortgages more expensive, and MaPPs can prevent some households from becoming homeowners.
  - Effects may be especially strong on lower-income households that rely on higher-risk mortgages (high LTV/high DTI).
- Policy measures to protect affordability without compromising financial stability:
  - Policymakers can strengthen policies to promote housing affordability, including:
    - homeownership subsidies,
    - housing allowances,
    - social rental housing,
    - rental support and regulation.
  - A practical classification divides subsidies into supply-side and demand-side interventions.

*Source: mphpeea - 3. Israel: House Prices and Housing Loans*

### 1. Price-to-Income Ratio

### 1. Price-to-Income Ratio

### Figures and Indicators
- Price-to-Income Ratio (Index, 2010 = 100).
- Price-to-Income Ratio Percentile, 2017:Q3 or Latest Available (100 = highest in history; 0 = lowest in history).
- Price-to-Rent Ratio (Index, 2010 = 100).
- Price-to-Rent Ratio Percentile, 2017:Q3 or Latest Available (100 = highest in history; 0 = lowest in history).

### Observations on Housing Subsidies and Support
- Owner-occupied housing receives public support in many European countries, reflecting expected economic and social benefits associated with homeownership.
- Non-targeted subsidies for home-ownership could:
  - encourage household indebtedness;
  - contribute to higher house prices;
  - lead to an increased risk of financial instability.
- Policies such as housing allowances provide assistance to low income households in renting and other housing costs.
- Implemented subsidies reported include grants to home buyers and mortgage relief for over-indebted homeowners.

### Public Spending on Housing Allowances (as reported)
- In 2015, public spending on housing allowances is the highest in the UK at 1.4 percent of GDP, followed by France and Finland.
- Denmark, Germany, the Netherlands, and Sweden: about 0.5 percent of GDP.
- Austria, Bulgaria, Croatia, Czech Republic, and Ireland: between 0.1 and 0.3 percent of GDP.
- No housing allowance programs reported for Romania, the Slovak Republic, and Slovenia.

### Social Rental Sector (as reported)
- Social rental sector accounts for less than 4 percent of the total dwelling stock in Estonia, Hungary, Latvia, Portugal, and Switzerland.
- Accounts for between 4 and 6 percent of the stock in Germany and Norway.
- Czech Republic, Finland, and the UK have an intermediate-size social rental housing sector.
- Sector relatively large in Austria, Denmark, and the Netherlands.
- No social rental housing reported in Croatia, Cyprus, Greece, Sweden, and Turkey (according to the OECD Affordable Housing Database).

### Tax Deductions for Mortgage Interest
- Tax deductions of mortgage interest payments are a widespread instrument of tax relief for home buyers.
- Tend to be poorly targeted:
  - “rarely means-tested, although they are generally, but not always, capped.”
  - “these deductions are not always restricted to first-time home buyers.”

### Macroprudential Policies (MaPPs) and Housing Markets
- Objectives of MaPPs in Europe:
  1. increase the resilience of the financial system to aggregate shocks by building and releasing buffers;
  2. contain the buildup of systemic vulnerabilities over time by reducing procyclical feedback between asset prices and credit and containing unsustainable increases in household debt;
  3. control structural vulnerabilities within the financial system that emerge through interlinkages, mostly from exposures to the housing markets.
- Commonly used measures:
  - Borrower-side measures: LTVs, DTIs/LTIs, stepped-up amortization requirements.
  - Bank capital requirements: countercyclical capital buffers, systemic risk buffers, systemically important financial institution buffers, floors on risk weights.
- Implementation issues:
  - Potential leakages and circumvention, including by nonbanks and loans financed by internationally active banks.
  - Borrower-based measures are not always applied to all types of loans.
  - Regulatory parameters have been broadened in some jurisdictions to cover nonbanks, but important gaps remain.

### Evidence on Effectiveness of MaPPs
- Case studies show borrower-side measures, supported by lender-based measures, help limit the share of riskier mortgages, contributing to greater resilience.
- In most countries following introduction of MaPPs, the growth of high-LTV mortgages slowed down.
- Uncertainty remains whether MaPPs can contain the formation of house price and credit bubbles while monetary policy remains accommodative.
- Empirical evidence and lessons remain tentative because experience in many European countries does not yet span a full financial cycle and institutional arrangements vary widely.

### Trade-offs and Affordability Concerns
- MaPPs’ effectiveness has been circumvented, and their implementation has generated affordability concerns.
- Rise in housing prices has led to deterioration of affordability in a number of European economies, creating policy conflicts between financial stability and housing affordability goals.

### Main Policy Conclusions (three-fold)
- (1) Fundamental drivers of house prices are often beyond the scope of MaPPs. Although a low-interest environment can affect the housing market, house prices are often the function of many other factors (supply of land, zoning restrictions, tax policy, etc.). Policymakers may remain unconcerned about housing price rises if they are not driven by unsustainable debt level.
- (2) Against the accommodative monetary policy stance, MaPPs can limit riskier mortgages and contribute to stronger bank balance sheets. The question that is more difficult to answer: can MaPPs contain the formation of house price and credit bubbles as monetary policy remains accommodative?
- (3) Given the many other drivers of house prices, additional policies (tax policy, mortgage-interest deductibility, zoning, construction, and planning restriction) may be needed to contain house-price bubbles, particularly if affordability becomes a concern.

*Source: mphpeea - 1. Price-to-Income Ratio (mphpeea - 1. Price-to-Income Ratio, https://www.imf.org/-/media/files/publications/dp/2020/english/mphpeea.pdf)*

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_Source: https://www.imf.org/-/media/files/publications/dp/2020/english/mphpeea.pdf_