##ing property price bubbles. 7 in other words, financial laws and regulations and government policies are markedly “ procyclical ”, though here the cycle is much longer than business cycles. the financial innovation of subprime rmbs is surely one example. so the second lesson is that we should avoid an excessive loosening of financial regulations and government policies in the demographic bonus phase. here macroprudential policies become important, which rely on measures such as ltv and dti requirements. 8 unfortunately however, i find most discussions about macroprudential policies are concerned only with taming overly optimistic expansion of credit and fund flows, while they fail to give sufficient attention to the often “ procyclical ” regulatory changes that trigger such expansion. thus, i still have strong reservations over the effectiveness of some macroprudential measures in a truly malign bubble, since such measures may simply mean temporary halting of the expansion and thus amount to “ kicking the can down the road ”. 9 avoiding excessive tightening of a policy in the demographic onus phase next, what is the lesson for the collapsing stage of a bubble? adjustment is still under way, even in japan after more than two decades since the 1990 bubble burst. however, one thing is clear : adjustment is long and severe when the economy is under the burden of an ageing population, or in the demographic onus phase. it is also becoming evident that there is no quick fix for the problem and no quick return to the “ old normal ” of the population bonus phase. policy makers now face dual problems : they have to minimize the likelihood of another malign bubble in the future, and at the same time they have to minimize the current distress caused by the past bubble. future bubble prevention usually leads to significant tightening of once - loose regulations and government policies toward banking and housing finance systems. the thrust of strict regulations is fueled by popular anger against the beneficiaries of the past malign bubble. at the same time, however, we should be aware that we are in a phase of demographic onus, with lower demand for property than in the demographic bonus phase of decades ago. this means regulatory measures appropriate in the population bonus phase may be too strict in the population onus phase. so we must avoid too strict a policy in the population onus in fact, the regulatory changes of 2004 ( the so - called bear sterns exemption and the regulatory change with respect to fannie mae and freddie mac ) caused unprecedented rapid

steep increase in loans coincide, then a financial crisis seems more likely. malign property bubbles : interplay of demographic trends and institutional factors demographic trends have a significant effect on property prices, especially their land component. 2 in the population dividend phase, young baby boomers want to buy more land and save more real money for their retirement. since the supply of land is physically limited, the real price of land will go up. similarly, if nominal money supply is held constant, the “ price ” of real money holdings, which is the inverse of the price level, should also go up, implying deflation. being mandated to maintain price stability, the central bank is then likely to increase nominal money to keep prices stable. the result is an increase in property prices while general price levels remain stable. 3 the story, however, does not end there. property markets are also influenced heavily by institutional factors. the supply of land is regulated by the government in many countries, typically in the form of zoning. housing finance systems are heavily dependent on financial laws and regulations. 4 property markets are subject to high transaction costs, which may change as a result of financial innovation. 5 any change or even prospect of change in these institutional factors may drastically change the dynamics of property prices, leading to a considerable deviation from the underlying fundamentals, that is, to a property bubble. in fact, in the population dividend or bonus phase, when baby boomers ’ demand for property is strong, the demand for institutional change is also strong, favoring easier acquisition of property. the government is likely to come under political pressure to loosen financial laws and regulations, which in turn fuels expectation of further loosening. these changes, and the prospect of change, induce credit expansion to finance property acquisition and push up property prices further and far beyond their fundamental value given the initial institutional framework. the price hike caused by such institutional changes may even induce overly optimistic expectations of the “ this - time - is - different ” type about property markets and prices. see, for example, takats, elod ( 2012 ) : “ aging and house prices, ” journal of housing economics, vol 21, no 2, june, pp 131 – 41, and nishimura, kiyohiko g. ( 2011 ) : “ population ageing, macroeconomic crisis, and policy challenges, ” panel discussion at the 75th anniversary conference of keynes ’ general theory, university of cambridge, 19 – 21 june 2011. see nishimura, k