FEATURE: REAL ESTATE
“Leaning against the wind is a proactive approach to tackling asset
bubbles when they are identifi ed, rather than waiting to clear up
the mess after they have burst”
to make risky and irrational decisions. Th is is because leaning
against the wind off sets the asymmetrical bias of the current
PROFILE – FACT BOX
policy adopted by central banks.
It will also improve fi nancial stability because it will reduce the
probability of asset bubbles infl ating further and eventually
resulting in macro-economic volatility. According to research by
the IMF, housing price bursts have been associated with an
average GDP loss of 8%, and have lasted for about four years.
CAN CENTRAL BANKS
CONTAIN HOUSING BUBBLES?
When housing prices are approaching unsustainable levels,
central banks should raise interest rates above that normally
required to achieve a predetermined stable infl ation level. Th is
will help reduce the size of the bubble and prevent the fi nancial
instability that results from a burst bubble.
Furthermore, by monitoring aggregate credit developments,
central banks can identify whether a housing bubble is driven by
credit developments. If the bubble is caused by excess liquidity,
central banks can withdraw liquidity by using other tools, such as
Ahmed Sule, CFA
reserve requirements and discount window lending.
Career highlights:
Although these tools are necessary to control housing price
Ahmed Sule, CFA, is an investment
bubbles, central banks should also consider using those tools in
strategist at Diadem Capital Partners
conjunction with additional regulatory oversight. As we have
Limited, responsible for establishing and
learnt from the current crisis, additional regulations need to be
executing the company’s investment
put in place to prevent a recurrence of another housing bubble.
strategy. He joined Diadem Capital from
KPMG Corporate Finance in London.
Central banks need to implement new capital requirements for
Prior to joining KPMG, Sule trained at
banks and rules to prevent excessive risk-taking.
PricewaterhouseCoopers, Nigeria and
In applying the leaning against the wind principle, central
gained valuable experience at Chevron
banks should take the following factors into consideration:
and RSM Robson Rhodes in Guernsey. he
monetary authorities should ensure that they react to asset
obtained his Bachelor’s degree in
misalignments, and not to every increase in asset price, by
Accounting from Ogun State University,
targeting asset price bubbles, not asset prices; the authorities
Nigeria. He is also a chartered
should evaluate each bubble and should react only when there is
accountant and an associate member of
a threat to fi nancial stability. Finally, the central bank should
the Chartered Institute of Bankers and
properly communicate its rationale to market participants.
Chartered Institute of Taxation and a
Despite pessimism about leaning against the wind, a proactive
certifi ed information systems auditor.
approach to dealing with housing bubbles promotes a more stable
economy, reduces moral hazard and the likelihood of future
housing bubbles. It is also important for central banks to consider
whether to intervene when bubbles develop in other asset classes,
such as equities and commodities.
As we are now seeing, the consequences of a reactive approach
can be catastrophic.
WWW.CFAUK.ORG PROFESSIONAL INVESTOR 41
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