The International Monetary Fund is calling for a back to basics approach to mortgage lending. It has been studying the role that house prices and bank lending played in the latest big recession and has called for changes to tighten things up.
The IMF said that recessions that are linked to housing price collapses are two to three times more severe and last a lot longer than 'normal' recessions.
The organisation has also called for a fundamental overhaul of the US housing finance. It questioned the role of the US government, which since the Great Depression has been an active player in the market by encouraging home ownership among low income groups.
The IMF said well-built public homes for rental may be a better solution than trying to pressurise people into taking on unsustainable debt in order to buy.
It also said that countries with a high level of variable rate loan loans amplifies the effects of mortgage credit growth - when there is more credit available it tends to push house prices up further because what the IMF calls 'myopic borrowers' are tempted to load up on debt.
This is because the variable rate is usually lower than a fixed rate loan - at least at the beginning. But when rates go up, the heavily borrowed become financially distressed with consequences for the whole economy.
Variable rate loans - whether they are trackers or standard variable loans - are the norm in Ireland, the UK and Spain. But elsewhere in Europe and in North America, long-term fixed rate loans are more common and so there is less disruption from interest rate hikes.
