The IRS has issued Notice 2006 -87, 2006-47 I.R.B. (Oct. 23, 2006).  As explained in the Treasury Department’s press release (HP-133):

The Treasury Department and IRS issued Notice 2006-87 today, which permits individuals who work outside the U.S. and live in foreign countries with high housing costs to deduct or exclude a greater portion of their housing costs.

Although U.S. citizens and residents are generally subject to U.S. tax on their worldwide income, § 911 permits individuals who live and work outside the U.S. to exclude from U.S. tax portions of their earned income and housing costs. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) made several changes to § 911, one of which effectively placed a limit on the amount of housing costs that could be taken into account under that section. TIPRA provided the Treasury Department with authority to adjust the new housing cost limitation based on geographic differences in housing costs relative to housing costs in the U.S.

In the Notice, using the approach suggested in the legislative history to TIPRA, Treasury exercises its authority to increase the housing cost limitation, setting forth new higher housing cost amounts for specific locations. The relief provided by the Notice is retroactive to the effective date of TIPRA.

For press coverage, see Ryan Donmoyer, Treasury Reduces Tax on Housing for U.S. Expatriates, Bloomberg:

Expatriate Americans living in high- rent cities such as Hong Kong and London will be partially spared from a tax increase on their employer-sponsored housing allowances, the U.S. Treasury Department said. The department said employees can exclude up to $101,116 in housing subsidies from income subject to tax if they live in Hong Kong and $58,916 if they live in London; adjustments for other cities are included in the notice. A law passed this year would have set the cap at $11,536.