Policy Response to Housing Booms

Abstract

Recent studies provide extensive evidence that housing booms and busts are an important cause of banking crises.1 The IMF has devised four measures to estimate the costs of financial crises: fiscal costs arising from financial sector rescue packages, output losses, increase in public debt, and peak non-performing loans. In 2009, an IMF estimate placed the total cost of the 2008 world financial crisis at an astonishing US$11.9 trillion, or the equivalent of approximately one-fifth of the entire globe’s annual economic output,2 while another estimate was that up to 45 per cent of the world’s wealth had been destroyed in less than 18 months. Although costs estimates have since been revised downwards substantially, the potential outlay still dwarfed any previous cost estimates of financial crises.3