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A
sharp downturn in U.S. residential and commercial property
prices in 2007 and 2008 rocked banks that were highly leveraged
in the sector, sparking the global financial crisis and deep
recession. With the economic recovery now well under way, bank
holdings of commercial and apartment mortgages rose 9 percent
and 12 percent, respectively, in the past year.
Eric Rosengren, president of the Boston Fed and an influential
financial regulator at the U.S. central bank, said the "sharp"
rise in apartment prices in particular may signal financial
instabilities that interest rates, which are only gradually
rising, may not be able to contain.
"Because real estate holdings are widespread, and the monetary
and macroprudential tools for handling valuation concerns are
somewhat limited, I believe we must acknowledge that the
commercial real estate sector has the potential to amplify
whatever problems may emerge when we at some point face an
economic downturn," Rosengren said in prepared remarks for
delivery to a banking supervision conference in Bali, Indonesia.
He noted that real estate has repeatedly played a big role in
episodes of financial instability, and that prices are now
outpacing growth in building owners' operating income.
Since equilibrium interest rates - the Fed's traditional tool to
guide the economy - could remain lower than decades past,
Rosengren said, "this would require a greater emphasis on
macroprudential tools if valuations became a source of concern."
Such tools include rules and restrictions on bank holdings. "It
is prudent to keep a healthy, ongoing focus on the sufficiency
of these tools and their ongoing enhancement," he added.
(Reporting by Jonathan Spicer; Editing by Leslie Adler)
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