Regionally-Differentiated Debt Cap Rules: A Hungarian Perspective

Budapest, the capital of Hungary, has experienced a two-year growth rate of 50% in housing prices (Q2 2014 – Q2 2016). This increase has been significantly higher than in the rest of Hungary, but calculations show that houses are not yet overvalued in any region of the country. Still, the characteristics of the housing market in the Budapest metropolitan area make this region the primary candidate for a possible regional housing bubble in the future. International experience has shown that housing bubbles accompanied by lending booms pose a serious risk to financial stability. Therefore, the Magyar Nemzeti Bank has started to evaluate the potential macroprudential interventions that could be applied in a regionally-differentiated manner. Our analysis allowed us to identify capital requirements and concurrently implemented payment-to-income (PTI) and loan-to-value (LTV) limits (referred to as debt cap rules) as the most promising avenues for intervention. According to our evaluation, debt cap rules outperform capital requirements in several dimensions. Several challenges need to be addressed before actual macroprudential policy intervention can be considered. We highlight a number of calibration issues and review potential spillover effects. We conclude that the regional tightening of the already introduced PTI and LTV limits could support financial stability objectives but their interaction with other policy areas, including fiscal, social and employment policy, would warrant careful consideration and very tight coordination. Full Publication: Macroprudential Frameworks, Implementation and Relationship with Other Policies