IF THERE is one chart that captures the madness of the housing bubble in the first half of the 2000s, it is Robert Shiller's index of real (ie, inflation-adjusted) house prices in America. The index goes back to 1890, and for the first 100 years or so prices go up and down but gain very little overall. Then, starting in the late 1990s, house prices pretty much double in real terms within a decade (see chart 8). The run-up in values was not just unprecedented, it was obviously lunatic. That begs an equally obvious question: if no one intervened to pop that bubble, is anyone likely to do so next time round?

Some argue that the market has learned its lesson, although even the bankers do not sound all that convinced. The crisis has clearly prompted changes to risk management and underwriting practices: more emphasis on affordability, more rigorous stress-testing, better pricing for borrowers with more equity to put in. The data from this debacle will inform the models of the future. Mr Jennings of FICO, for instance, says he is working on ways to relate customers' credit scores to the macroeconomic environment so that lenders can judge how the odds of default change when, say, unemployment goes up or down.

But for the reasons explained earlier in this report, property exerts a siren-like attraction for banks. Property loans are relatively light on capital and backed by real assets. In retail banking mortgages are thought to anchor long-term relationships with customers. Lending on commercial property is lumpy enough for a single big deal to get sales teams to their targets. To keep it under control, HSBC imposes a global 12.5% cap on commercial-property assets as a proportion of its overall book.

Prophets scorned

The crisis has made it obvious that when things get frothy, banks find it difficult to hold back. Property valuers in Dubai who advised banks that the market was overheating were ignored. Regulators in Britain and America who issued similar warnings were disregarded. Whistleblowers inside banks fared little better. An ex-employee of Countrywide, a particularly gung-ho American lender, recalls presenting a forecast of a flat housing market to a meeting at the bank in 2006 and being shouted down by salespeople, who argued that if they priced for credit risk on that basis they would be out of business.

Taking a break

If the market cannot be trusted to ease up on property when it overheats, that leaves policymakers. Very broadly, there are three levers that officials can pull to make property safer. All three of them need to be used.

The first is the institutional framework that is controlled by governments—things like tax breaks, housing subsidies, land supply and the laws on recourse in the event of default. Some of these are more tractable than others; for example, the case for a property tax is theoretically powerful, but no one wants to do anything that might subdue housing markets while they remain weak. Nonetheless, fiscal pressures may require governments to introduce big changes. Under draft proposals for pruning America's budget deficit, mortgage interest will enjoy fewer tax advantages.

The second lever is the system of mortgage financing. Disentangling the various causes of the property bubble is extremely difficult, but few would dispute that easy credit played a part in driving up prices and making the bust worse. According to a recent OECD report on housing and the economic recovery, financial deregulation may have boosted real house prices across industrial countries between 1980 and 2005 by as much as 30%. More liberal financing regimes are often a good thing (ask any young Italian who wants to buy a home), but only as long as basic underwriting standards continue to be met.

The crisis has set off a search for the best possible mortgage-financing system. Many observers warmly commend the Danish model, which features specialised mortgage lenders that observe strict loan-to-value limits, along with a system of matched funding in which each mortgage is financed by a specific bond with the same maturity and cash-flow characteristics. Losses at Danish mortgage banks remained low and there was plenty of liquidity throughout the crisis.

The Danish system, like the American one, also protects borrowers from interest-rate risk by offering long-term fixed-rate mortgages (although adjustable-rate mortgages were spreading fast before the crisis). That has undoubted appeal for policymakers in countries where floating-rate mortgages expose borrowers to the risk of payment shocks as rates rise.

Inimitable Copenhagen

In truth, however, there is no magic system. The Danish mortgage banks are clearly too big to fail, so the problem of an implicit government guarantee for banks remains. The same is true for Canada, where those who want to borrow more than 80% of the value of a property have to pay an insurance premium to a government agency. And even if the perfect model existed, it might not be transferable. The specialised infrastructure of the Danish mortgage-bond market, for instance, could not be easily replicated elsewhere.

And as so often in finance, constraining liquidity in one part of the system risks shifting trouble somewhere else. Danish banks had problems with commercial property. Spain's residential-mortgage standards were fine, but the same could not be said of banks' lending to developers. German banks that were not able to go mad on mortgages at home bought up American subprime loans instead.

Imposing rigid limits on how much people can borrow either disenfranchises some—first-time buyers and the self-employed tend to suffer most—or risks encouraging them to find a way around the rules by topping up their borrowing with more expensive, unsecured financing. Some lenders also fret that if underwriting becomes too prescriptive, borrowers are relieved of taking responsibility for their own actions. These are legitimate worries, but they carry alarming echoes of arguments put forward by bankers at the height of the housing boom just gone.

The third lever that policymakers can pull is the now-popular idea of leaning against the wind when systemic risks are rising. Such “macroprudential” regulation is already common in some parts of the world. Governments and regulators in China, Hong Kong, Singapore and elsewhere always seem to be adjusting loan-to-value ratios, restricting the availability of credit for speculative homebuying, imposing taxes on homes that are flipped within a certain period and so on.

Macroprudential regulation is a good idea in theory, but extremely hard to do well. First, there is the difficulty of spotting bubbles, which often look unsustainable only when they have already burst. Despite the evidence of Mr Shiller's chart, lots of clever people in finance and in the corridors of power persuaded themselves that things were different this time. And once property booms have got going, they can be hard to calm down, as China's authorities have found. Still, the politics of dampening booms is easier in emerging markets, where there are usually more people to help into homes than there are existing homeowners. “Macroprudential regulation is not seen as an intervention,” says one Asian central banker. “It is seen as part of a healthy credit relationship.”

Regulators and central banks in developed economies are feeling much more nervous about the prospect of cooling property markets. “We know that punchbowl-removal operations are very unpopular among the slightly sloshed,” is how one Western regulator puts it. The sloshed can include governments themselves. Thanks to transaction taxes, property bubbles are helpful to exchequers and the jobs market when they first get going. Regulators will therefore need to have a very clear mandate, or use automatic measures such as a countercyclical loan-to-value rule, to resist the pressures they will face when the next boom is under way.

This mortar coil

That problem is years away; but in America the worst effects of the property crisis are probably over. The banks with the biggest exposures to dud commercial assets are smaller lenders, and the government is willing to provide support to residential markets. But prices are likely to keep falling this year, so economic recovery will lack one of its usual booster rockets.

Parts of Europe are much more fragile. Prices still have further to fall to reach fair value, the capacity of certain banks and governments to cope with losses is more doubtful, and the risk of interest-rate rises looms. Even if the sense of crisis fades, the chronic effects will linger for years as property weighs down banks' balance-sheets, first-time buyers struggle to get on the housing ladder and buildings in second-rate locations slowly decay.

Property may be prone to excess everywhere but the policy response to the events of the past decade will—and should—vary from country to country. Culture, taxes, politics, demography, laws and physical geography all have an influence on property markets. Americans like to own their homes. The Hong Kong government has a limited supply of land. The Danes understand, as few others do, that the market value of their debt can shift.

But if there is one universal lesson from the recent past, it is that leverage is lethal. Upping the amount of equity that banks have to hold is one way of keeping down the amount of debt that finds its way into property, but this is still an asset class that is privileged, not imprisoned, by the capital regime. As one Asian regulator points out, even highly capitalised banks like lending against homes. The best way to limit the damage from a property bust is to exercise more direct control over the amount of debt available to property owners and developers, whether through discretionary interventions or standing rules.

The past decade has proved again that the phrase “safe as houses” is a nonsense. Property will always be volatile—and financial crises will always be destructive. The main aim for policymakers must be to sever the connection between the two.