The global financial crisis changed the way we view macroeconomic policy, especially in the context of housing and mortgage markets. The main policy tenet in dealing with a real estate boom used to be “benign neglect” (Bernanke (2002)), better to wait for the bust and pick up the pieces than to attempt to prevent the boom. Two assumptions underlie this advice: the belief that it is extremely difficult to identify unsustainable booms, or “bubbles”, in real time and the notion that the distortions associated with preventing a boom outweigh the costs of cleaning up after a bust.

But the crisis has shown that post-bust policy intervention can be of limited effectiveness, and thus the costs associated with a bust can be daunting. While early intervention may engender its own distortions, it may be best to undertake policy action on the basis of a judgment call if there is a real risk that inaction could result in catastrophe. Yet a call for a more preventive policy action raises more questions than it provides answers to. What kind of indicators should trigger policy intervention to stop a real estate boom?

If policymakers were fairly certain that intervention was warranted, what would be the policy tools at their disposal? What is their impact? What are their negative side effects and limitations? What practical issues would limit their use? This short paper explores these questions