The financial crisis of 2007-08 brought real estate boom-bust cycles to the fore of policy discussions and academic circles. What triggered the illiquidity and, ultimately, solvency problems in the financial sector that rocked the markets and brought the global economy to  the brink was the downturn in the U.S. residential real estate. During the boom years, first- time buyers (and sometimes speculators) had taken advantage of the relaxation in lending standards to obtain loans with little down-payment requirements and back-loading features such as negative amortization schemes. Existing homeowners also utilized the easy credit conditions as refinancing activity. With another real estate boom-bust bringing woes to the world economy, a quest for a better policy toolkit to deal with these boo m-busts has begun. Macroprudential measures could be in such a toolkit. Yet, we know very little about their impact. This paper takes a step to fill this gap by analyzing the Korean experience with these measures. We find that loan-to-value and debt-to-income limits are associated with a decline in house price appreciation and transaction activity. Furthermore, the limits alter expectations, which play a key role in bubble dynamics.

The market that brought the global economy to the brink was the downturn in U.S. residential real estate. During the boom years, first time buyers (and sometimes speculators) had taken advantage of the relaxation in lending standards to obtain loans with little down-payment requirements and back-loading features such as negative amortization schemes. Existing homeowners also utilized the easy credit conditions as refinancing activity, frequently with cash-out options, picked up. When house prices started to fall, an increasing number of homeowners, including not only speculators but also owner-occupiers, were quickly pushed to the negative-equity territory. Defaults increased as strategic default incentives kicked in and homeowners facing difficulty affording their mortgage payments because of interest rate resets were unable to refinance. Losses reflected in loan portfolios carried over to the valuation of mortgage-backed securities. Unconventional policy measures were taken to provide liquidity and, soon after, to ensure the survival of key financial institutions.