SYDNEY (Reuters) - Policy makers daunted by the idea of puncturing asset bubbles in coming years can learn from Australia’s central bank, one of the very few to have deflated a housing boom without turning it into a crash.

As the world cleans up after the U.S. housing debacle, central bankers are already fretting over how to tackle the next bubble, which may not be too far off as super-easy monetary policies worldwide leave financial markets flush with cash.

Up until a year ago, many central bankers such as Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan, believed bubbles can’t be spotted or tempered.

But the Reserve Bank of Australia (RBA) challenged that view when it leaned against Australia’s housing boom in 2002 by refusing to cut interest rates despite a world economic slowdown, opting instead to talk down the property market.

“Other countries are looking at the Australian example as a very positive one, and there are some lesson to be learnt from that episode,” said Brian Redican, an economist at Macquarie.

The bursting of the U.S. housing bubble in 2007 after its unfettered rise brought the world economy and financial markets to their knees. In contrast Australia’s housing market has been remarkably resilient, supporting consumer confidence and helping Australia become one of a rare breed of developed nations to dodge a recession.

“Up until the crisis, it was received wisdom that central banks should probably target mostly inflation. That is now beginning to change very quickly,” said Frederic Neumann, a regional economist at HSBC in Hong Kong.

The European Central Bank, for one, is coming round to the idea that it may need to respond to asset bubbles.

For now, China, Hong Kong and South Korea are seen most vulnerable to forming new bubbles in property and stock markets. The RBA also warned last week record low local interest rates could inflate a housing bubble.

WATCHING PROPERTY MORE CLOSELY

At the heart of a long-standing debate about monetary policy is whether central banks should target asset prices alongside inflation. Conventional wisdom says central banks should care about asset prices only to the extent that they affect inflation.

This is because bubbles are hard to spot, and economists can’t agree on what counts as a bubble.

Bubbles are usually defined as prices that have risen so far they deviate from economic fundamentals for an extended period. Yet, not all price rallies are unjustified. “It’s extremely difficult in reality to pin-point,” said HSBC’s Neumann. “By the time you realize ‘Oh we have a bubble in our hands’, it runs so quickly it’s almost too late to stop.”

The RBA deftly avoided the problem by talking around it instead, highlighting the economic risks of the housing boom.

“We should not get too hung up about trying to decide what is a ‘bubble’,” Glenn Stevens, current RBA Governor and then deputy governor wrote in a conference paper in 2003. “It tends to promote the idea that if we can define something as not being a bubble, then we can forget about it.”

To build its case that property prices were getting out of hand, and unhappy that government data was not timely enough, the RBA took the unusual step of commissioning coverage on the housing market from private-sector firms.

It focused on ratios such as the ratio of income to home prices to gauge the amount of debt buyers took on, and the number of home loans taken out for investment housing.

Falling bank lending standards, rising innovation and competition among mortgage lenders also flagged market frenzy.

Lenders invented deposit bonds where they paid the first deposit for home buyers for a fee, and people competed in television shows to renovate and sell flats at a top price.

RBA officials attended property seminars to observe over-zealous salesmen, dubbed locally as “property spruikers,” who encouraged buyers to think home prices will never fall.

All that led the RBA to refrain from joining other central banks in cutting rates in 2002-03 when economies faltered after the September 11 attacks, the SARS outbreak and the Iraq war.

Then RBA governor Ian Macfarlane went out of his way to talk would-be property buyers out of their investments. “I’m using a certain amount of moral suasion to try and get...to investors, to make them sit back and think again,” he said in 2002.

The RBA was so forceful in talking down the housing market many suspected property prices dictated its monetary policy, which the RBA denied. It declined to respond to this article.

“IT’S THE LEVERAGE, STUPID”

The RBA’s efforts worked, with annual growth in house prices halving to about 9 percent in June 2004, from over 19 percent six months earlier. By March 2005, they were up just 0.1 percent.

That experience contrasted starkly with the United Sates and UK where prices were allowed to fly with scant restraint.

Home prices in 20 U.S. metropolitan areas in May were down nearly a third from their record high hit in July 2006, according to the Standard & Poor’s/Case Shiller home price index.

In Australia, average prices in the second quarter were just 2.2 percent off a record hit in March 2008, official data show.

The RBA thought its aggressive response necessary because housing bubbles are driven by debt and more damaging to the economy, than say a stock market bubble.

“To coin a phrase, ‘It’s the leverage, stupid,’” Stevens wrote in 2003.

To be fair, the RBA owes some of its success to good fortune.

Australia’s housing market is sensitive to changes in the RBA’s policy rate as 80 percent of mortgages are variable-rate loans. In comparison, about the same percentage of U.S. mortgages are fixed-rate and tied to long-term bond yields.

The commodity price rally from 2004 also saved the resource-rich country from slowing economic growth brought about by rate hikes from 2001-07.

One of the main arguments against central banks targeting asset prices is that rate hikes are too blunt a tool for popping bubbles since they can drag the whole economy into recession.

The fact that Australian property prices continued to rise after 2004, making homes among the least affordable in the world, meant the RBA was not entirely successful, some economists say.

But most still agree Australia’s economy fared better after the RBA’s actions, and that in itself is laudable.

“At least they tried,” said HSBC’s Neumann. “The RBA should be commended for having done so.”