FEATURE: REAL ESTATE
“As we are now seeing, the consequences
of a reactive approach can be catastrophic”
Opponents of the leaning against the wind principle include eminent have as extensive a level of
SON
central bankers, such as Alan Greenspan and Ben Bernanke, who argue knowledge as market participants in
that monetary policy is too blunt a tool. Advocates of this approach identifying the fundamentals driving
suggest that central banks should respond to changes in asset prices only the prices of these assets.
© HENRIK JONS
when they have had an impact on infl ation and output expectations. Second, opponents argue that, as
Central bankers cite several reasons for not using monetary policy to a majority of central banks have an
contain housing credit bubbles. First, critics argue that housing price infl ation-targeting mandate, it is
bubbles are diffi cult to identify, because there are no reliable indicators by only necessary to take changes in
which to measure them. In addition, they suggest that regulators do not asset prices in to consideration if
they have a direct impact on
infl ation and output forecasts.
STATS. It is also often argued that
pricking a bubble could destabilise
TABLE 1: US WAGE, RENT AND HOUSING PRICE MOVEMENT 2000-2006
the economy and plunge it into
recession.
S&P/Case-Shiller US
Rent % Home Price % Median %
Finally, cynics state that the safe
Year Index change Index change Income ($) change
popping of asset bubbles slows the
upward path of the economy by
1999 180.1 98.29 40,696
weakening the macro-economic
2000 187.4 4.10% 107.9 9.80% 41,990 3.20%
fundamentals. Th ey argue that,
2001 196.2 4.70% 116.23 7.70% 42,228 0.60%
because consumption and output
2002 202.4 3.20% 128.58 10.60% 42,409 0.40%
increase when the
2003 207.7 2.60% 142.29 10.70% 43,318 2.10%
housing market is buoyant, it is
2004 213.8 2.90% 163.06 14.60% 44,334 2.30%
unwise to target housing bubbles.
2005 220.4 3.10% 186.97 14.70% 46,326 4.50%
2006 229.8 4.30% 187.31 0.20% 48,201 4.00%
IS A REACTIVE APPROACH

2000-2006 22.60% 73.60% 14.80%
JUSTIFIABLE?
Leaning against the wind has
Source: Bureau of Labor Statistics, Standard & Poor’s, US Census Bureau.
certain drawbacks, but the current
WWW.CFAUK.ORG PROFESSIONAL INVESTOR 39
38-4138-41 house bubble.indd 39house bubble.indd 39 27/11/0827/11/08 16:44:3616:44:36
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