Boom-bust cycles in real estate markets have been major factors in systemic financial crises and therefore need to be at the forefront of macroprudential policy. The geographically differentiated nature of real estate market fluctuations implies that these policies need to be granular across regions and countries. Before the financial crisis that started in 2007 property markets were overvalued in a range of European countries, but much like in other constituencies active policies addressing this was an exception. An increasing number of studies suggest that borrower-based regulatory policies, such as reductions in loan-to-value or debt-to-income limits, can be effective in leaning against real estate booms. But many of the new macroprudential policy authorities in Europe do not have clear powers to determine them. Moreover, the cross-border spillovers may give rise to suggest the establishment of a well-defined macroprudential coordination mechanism for the single European market.

European System of Central Banks Macroprudential Research Network (MaRs) suggests, first, that policies adjusting loan-to-value ratios in a countercyclical way and combining them with debt-to-income limits can be expected to be more effective than traditional approaches. Second, cross-border regulatory spillovers may be significant. Much like in other constituencies, before the crisis active regulatory policies leaning against burgeoning real estate markets were the exception in Europe rather than the rule. A lesson from this experience is that going forward policymakers need be bold enough to lean against booming real estate markets that imply systemic risks. In terms of completing the regulatory setup in European Union (EU) countries for this purpose, it is important to note that only a subset of countries has the necessary legislation in place to actively use loan-to-value or debt-to-income limits. And among those who have, not all allocate their use to macroprudential authorities. Finally, the Single Supervisory Mechanism for banks, which started at the European Central Bank in November 2014, has a coordinating role for some lender-based regulatory instruments (as included in the Capital Requirements Directive IV and the Capital Requirements Regulation implementing Basel III) in that it can tighten relevant bank regulations in countries that joined but not relax them. A more complete macroprudential policy framework for supporting the EU single market for financial services would probably require a legal basis for the use of borrower-based instruments by macroprudential policy authorities in all member countries, including a well-defined cross-border coordination mechanism for both lender and borrower-based instruments.