The 3 policy tools to regulate and stabilizes housing market in UK, USA and France are risks provisioning’s, weighing of risks, and exposure limitations. The first two policies are similar to liquidity as well as reserve requirements in the sense that they affect the bank supply in the form of costs. But they are different in the sense that they apply particularly to housing credit, and as a result they are classified as targeted credit policies.
The main objectives of these types of policies are to limit the risks. The risks are limited as per the weights required by the regulatory framework. Often we can differentiate the risk weights by the true LTV ratio of individual loans. This can be understood by the following example. The different parts of LTV ratio of a housing loan, which are greater than a particular threshold, let us say it to be 80%, can be supposed to carry a higher risk weight compared to lower ratios.
This is the final and most important category as it consists of those measures that affect the cost which is required to purchase a home. These include different type of taxes involved, like capital gains, wealth and value added taxes), different type of subsidies that are given to people buying home for the first time and also to different other cases. These taxes’ effects can be easily understood if studied in the context of the user cost (UC) framework. The effects on credit actually are dependent upon the elasticity of housing demand. If there would have been perfectly inelastic demands, the housing quantity that is purchased would not undergo any change, as would be done by housing credit.
The analysis shows that all these policies as discussed above must be used in tandem to stabilize housing market in Melbourne as it will control demand supply dynamics in Melbourne. For example, general credit policies are important and must be made to regulate reserve requirements, liquidity requirements and credit growth limits. All these policies are applicable to the banking system but indirectly affect the housing sector as it is used to manage non interest rate in the country. Similarly, tax related policies such as like capital gains, wealth ad value added taxes), different type of subsidies that are given to people buying home for the first time can be used to control demand supply dynamics in the economy.