Soaring house prices in much of the world are emerging as a key test for the ability of central banks to curb their support for the crisis.

Pulling out stimulus too slowly may further inflate real estate and heighten concerns about long-term financial stability. Falling back too hard means disrupting markets and driving down property prices, threatening economic recovery from the Covid-19 pandemic.

With memories of the global financial crisis triggered by a real estate crisis still fresh in the minds of policymakers, how to contain soaring house prices is a dilemma at the forefront of deliberations as the resumption of growth sees some banks. centrals discuss slowing asset purchases and even raising interest rates.

Federal Reserve officials who are in favor of cutting their bond buying program have cited rising house prices as one of the reasons for doing so. In particular, they are watching closely the Fed’s purchases of mortgage-backed securities, which some fear could boost housing demand in an already hot market.

Over the coming week, central bankers from New Zealand, South Korea and Canada come together to set their policy, with house prices soaring every time, prompting something to be done so that housing remains affordable for regular workers.

New Zealand policymakers are battling the hottest real estate market in the world, according to the Bloomberg Economics Global Bubble Rankings. The central bank, which meets on Wednesday, has been given another tool to tackle the problem, and its projections for the official cash rate show it will start rising in the second half of 2022.

Faced with criticism for its role in raising house prices, Canada’s central bank was among the first in advanced economies to switch to less expansionary policies, with another wave of cuts expected in a policy decision as well. Wednesday.

The Bank of Korea warned last month that real estate was “significantly overvalued” and the burden of household debt repayment was growing. But a worsening virus outbreak could be a more pressing concern at Thursday’s political meeting in Seoul.

In its biggest strategic overhaul since the creation of the euro, the European Central Bank this month raised its inflation target and, with a nod to housing pressures, authorities will start to consider the costs. owner-occupied dwellings in their supplemental measures of inflation.

The Bank of England reported malaise in the UK property market last month. Norges Bank is another authority to have signaled concerns about the effect of ultra-low rates on the housing market and the risk of a build-up of financial imbalances.

The Bank for International Settlements used its annual report released last month to warn that house prices had risen more sharply during the pandemic than fundamentals suggest, increasing the sector’s vulnerability if borrowing costs rise.

While the unfolding of the pandemic era is expected to be gradual for most central banks, how to do it without harming mortgage holders will be a major challenge, according to Kazuo Momma, who was previously in charge of monetary policy at the Bank. from Japan.

“Monetary policy is a blunt tool,” said Momma, who now works as an economist at the Mizuho Research Institute. “If it is used for specific purposes such as restricting housing market activities, it could lead to other problems such as exaggerating the economic recovery.”

But failure to act carries other risks. Bloomberg Economics analysis shows housing markets are already showing 2008-style bubble warnings, fueling warnings of financial imbalances and worsening inequality.

New Zealand, Canada and Sweden rank among the world’s most sparkling housing markets, based on key metrics used in the Bloomberg Economics dashboard focused on Organization for Cooperation and Development member countries. economic development. The UK and US are also near the top of the risk rankings.

While many economies are still grappling with the virus or slow loan growth, central bankers may seek alternatives to interest rate hikes such as changes in loan-to-value limits or loan risk weights. mortgage – this is called macroprudential policy.

However, such measures are not guaranteed to be successful as other dynamics such as inadequate supply or government fiscal policies are also important variables for housing. And as cheap money gushes out of central banks, such measures are likely to struggle to dampen prices.

“The best approach would be to stop the further expansion of central bank balance sheets,” said Gunther Schnabl of the University of Leipzig, who is an expert on international monetary systems. “Secondly, interest rates could be raised very slowly and diligently over a long period.”

Another possibility is that house prices are reaching a natural plateau. UK house prices, for example, fell for the first time in five months in June, a sign that the housing market may have lost momentum as a tax incentive was to end.

There is no sign of this in the United States, where housing demand remains strong despite record prices. Pending home sales increased in all regions of the United States in May, with the northeast and west posting the largest gains.

While it won’t be easy for central banks to navigate the housing boom, it may not be too late to head off the next crisis. The demand for property versus speculative buying remains a powerful engine of growth. Banks are not showing signs of the kind of loose lending that preceded the global financial crisis, according to James Pomeroy, global economist at HSBC Holdings Plc.

“If house prices rise due to a shift in supply relative to demand, which the pandemic has created due to the increase in remote working and people wanting more space, this might not not trigger a crisis in the same way as previous real estate booms, ”Pomeroy said. “Problems can arise later, with even higher prices for the younger ones.”

As they step away from their crisis backdrop, monetary authorities in economies with heavily indebted households will need to be particularly careful, said Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis, who previously worked for the ECB and the International Monetary Fund.

“Real estate prices, like other asset prices, will continue to soar as long as global liquidity remains so plentiful,” she said. “But the implications are much more serious than other asset prices because they affect households much more widely.”