But it is only since 2009 that macroprudential policies have been applied in a more concerted and calibrated fashion – again to help moderate price increases in the residential property market. Following the Global Financial Crisis, the confluence of low interest rates, firm domestic demand underpinned by sustained income growth, and supply shortages in the residential property markets caused home prices to rise rapidly. This had implications for both price stability and financial stability. As rentals increased on the back of rising property prices, imputed rentals on owneroccupied accommodation accounted for about a third of overall inflation during 2011–2012. CPI-All Items inflation averaged 4.9% per annum during this period. MAS was concerned that this would unhinge general inflation expectations and spill-over into more rapid wage growth across the economy. At the same time, the stock of mortgages surged by about 70% from end-2009 to end-2012, posing risks for financial stability. To be sure, there was little imminent danger. Households’ net asset positions were still strong, with the aggregate household debt-to-asset ratio stable at around 16%. The non-performing loan ratios for mortgages remained low at 0.25%, and the amount of housing loans in negative equity was negligible. But if domestic income growth faltered or if the global interest rate cycle turned abruptly, mortgage financing burdens could escalate. Households’ balance sheets could deteriorate if home prices fell, as much of the increase in household wealth had been driven by a rise in the value of property assets.

Why macroprudential policy The conventional thinking pre-crisis was based on two assumptions: •  First, asset prices did not matter much. Central banks therefore focused on consumer prices and placed less emphasis on asset prices. •  Second, if risks in individual financial institutions were well controlled, the financial system as a whole would generally be safe. Regulators therefore focused on the safety and soundness of individual institutions and paid less heed to systemic risk. The collapse of the real estate markets in America and Europe, the breakout of the Global Financial Crisis, and the contagion of risk to seemingly sound financial institutions – against a backdrop of relative macroeconomic stability – showed both assumptions to be wrong. Thus was born macroprudential policy – which focused on the health of the financial system as a whole and its interactions with the macroeconomy, particularly developments in liquidity, leverage, and asset markets. In many emerging market economies, macroprudential policy has become an important complement to monetary policy to help secure economic and financial stability. In Singapore, the focus of macroprudential policy has been to promote sustainable asset prices. Asset prices matter for four reasons. First, volatile asset prices pose a risk to financial stability, especially when a run-up in asset prices is financed by easy credit and accompanied by a build-up in leverage in the economy. When asset prices correct, financial institutions’ vulnerability to default and loss increases. Second, asset price inflation is as distortionary as consumer price inflation.