April 04, 2008	Friday	Rabi-ul-Awwal 26, 1429

WASHINGTON, April 3: Central banks should take into account housing prices when they decide the level of their key interest rates, the International Monetary Fund said on Thursday.

The IMF, noting that access to mortgage financing varies widely across the world, ranging from the easy-credit United States to the strictest-control, France, said that “countries where innovation in housing finance systems has advanced the most are more exposed to shocks originating in the housing sector.”

The results of a study published in a chapter of the IMF’s World Economic Outlook (WEO) looked at the changing system of housing finance over the past two decades and its implications for monetary policy.

The chapter was released ahead of next week’s WEO world growth forecasts and the spring meetings of the IMF and the World Bank on April 12-13 in Washington.

It also comes in the context of a global credit crisis stemming from the collapse of a US real-estate bubble and rising defaults on subprime, or high-risk, mortgages.

“The sharp weakening of the housing sector in several advanced economies over the past couple of years, and especially the financial turbulence triggered by increasing defaults in the subprime mortgage market in the United States, have raised concerns that, as a result of innovations in mortgage markets, the housing sector could be a source of macroeconomic instability,” the IMF said.

The US Federal Reserve has slashed interest rates and pumped, along with other central banks, hundreds of billions of dollars into the financial system since the crisis erupted in August.

The meltdown has weighed on other once red-hot housing markets, such as Britain and Spain, forced banks to write off billions in soured mortgage-related investments and put the brakes on global growth.

The practice in some countries, particularly the US, of homeowners using their home as a virtual piggy-bank when house prices were rising has heightened the impact of home prices on the economy, the IMF said.

“The increased use of homes as collateral has amplified the impact of housing sector activity on the rest of the economy by strengthening the positive effect of rising house prices on consumption via increased household borrowing the ‘financial accelerator’ effect.”

The IMF pointed out that in the US, a sharp decline in key rates to one percent in 2003 seemed to have contributed to the boom in home prices and housing investment.

“House prices would seem relevant for calculating the risks to the outlook for overall economic activity and prices, particularly during periods of rapid change in house prices,” said the 185-nation institution.—AFP