We assess the effectiveness of macroprudential policies against a number of different indicators of property sector activity and financial stability. At the cross-country level the use of LTV caps decelerates property price growth. Both LTV and DTI caps slow property lending growth. LTV caps also affect a broader range of financial stability indicators in economies with pegged exchange rates and currency boards. For Hong Kong SAR, LTV policy tends to be forward-looking, with caps lowered to counter downward movements in mortgage rates, and higher growth in mortgage loan and volumes of transactions. The reduction in caps appears to respond to small and medium size flat price appreciation and contributes to a decline in high-end volume growth after a year and total transactions volume growth after 1½–2 years. Price growth responds favorably after 2 years. The evidence suggests LTV tightening could affect property activity through the expectations channel rather than through the credit channel.

A central purpose of macroprudential tools is to contain the build-up of financial imbalances and underpricing of risk during a boom and to restrict the increase in measured risks in the subsequent bust. Another view defines the goal of macroprudential policy as limiting the risk of system-wide financial distress episodes that have significant macroeconomic costs (Borio and Drehmann, 2009). In recent times, a number of economies have used macroprudential policies to protect their financial systems from stress induced by volatile asset prices and rapid portfolio adjustments. In Hong Kong SAR’s case, faced with the onset of a credit-asset price cycle centered on the property sector, the authorities have introduced several changes since 2009 to policies concerning maximum loan-to-value (LTV) and debt service to income (DTI) ratios, as well as government-initiated land sales. One argument made in favor of macroprudential policies is that they can be fine-tuned to address particular risk factors and vulnerabilities, as compared to the more blunt instrument of interest rate adjustments that affect economy-wide credit aggregates (IMF 2011b). But fine-tuning macroprudential policies to specific risks could also impose additional regulatory costs on the economy. Moreover, not knowing the precise side effects of the measures, for example on property market activity, could risk the credibility of the regulator in the event of a property price reversal or a collapse. Since their use is potentially costly, it is important to isolate what outcomes the specific macroprudential policies do (and do not) affect. This paper assesses the effectiveness of LTV, DTI and land sales policies against a number of different outcomes—financial stability indicators, residential property prices, and transactions.