A quandary for Central Banks
The capability of Central Banks to reign in massive crisis support is being challenged by rising housing prices across much of the planet. Divesting stimuli too gradually risk ballooning real estate and exacerbating concerns about financial security in the long run. Tightening would disrupt markets and drive down home prices, jeopardizing the recovery from the Covid-19 outbreak. 
With recollections of the global financial crisis sparked by a housing bubble still strong in policymakers’ minds, the question of how to keep a lid on house prices is at the forefront of discussions as some central banks consider halting asset purchases and potentially hiking interest rates.
Facing criticism for its role in stoking housing prices, Canada’s Central Bank has been among the first from advanced economies to shift to a less expansionary economy. It may not trigger a crisis in the same way as previous housing booms, said Pomeroy.
In its most significant strategic rethink since the euro’s creation, the European Central Bank this month raised its inflation target. In a nod to housing pressures, officials will start considering owner-occupied housing costs in their supplementary measures of inflation.
The Bank for International Settlements used its annual report released last month to warn that house prices had risen more steeply during the pandemic than fundamentals would suggest, increasing the sector’s vulnerability if borrowing costs rise.
While the unwinding of the pandemic-era is expected to be gradual for most Central Banks, how to do so without hurting mortgage holders will be a crucial challenge, according to Kazuo Momma, who used to be in charge of monetary policy at the Bank of Japan.
The problems may arise further down the line, with younger people priced out of the property ladder even more. As they tiptoe away from their crisis settings, monetary authorities in economies with heavily indebted households will need to be especially careful, said Alicia Garcia Herrero, chief economist for the Asia Pacific at Natixis.
The latter used to work for the ECB and International Monetary Fund. In the coming week, central bankers in New Zealand, South Korea, and Canada meet to set policy, soaring home prices in each spurring pressure to keep homes affordable for regular work.
Norges Bank is another authority to have signaled its worry about the effect of ultra-low rates on the housing market and the risk of a build-up of financial imbalances. The best approach would be to stop the further expansion of central bank balance sheets, according to Gunther Schnabl of Leipzig University, an expert on international monetary systems.
Analysis by Bloomberg Economics shows that housing markets are already exhibiting 2008 style bubble warnings, stoking warnings of financial imbalances, and deepening inequality. U.K. house prices, for example, fell for the first time in five months in June, a sign that the property market may have lost momentum as a tax incentive was due to end.
As many economies still grapple with the virus or slow loan growth, Central Bankers may look for alternatives to interest-rate hikes such as changes to loan-to-value limits or risk weighting of mortgages – so-called macro-prudential policy.
The central bank, which meets Wednesday, has been given another tool to tackle the issue, and its projections for the official cash rate show it rising in the second half of 2022. If. But not acting carries other risks. As a second step, they could increase interest rates in a prolonged and diligent manner over a long period. Another possibility is that house prices reach a natural plateau.
