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A Close Look at Loan-To-Value Ratios: Evidence from the Japanese Real Estate Market

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  • Ono, Arito
  • Uchida, Hirofumi
  • Udell, Gregory
  • Uesugi, Iichiro

Abstract

Using a unique micro dataset compiled from official real estate registries in Japan, we examine the evolution of loan-to-value (LTV) ratios for business loans over the 1975 to 2009 period, the determinants of these ratios, and the ex post performance of the borrowers. We find that the LTV ratio exhibits counter-cyclicality, implying that the increase (decrease) in loan volumes is smaller than the increase (decrease) in land values during booms (busts). Most importantly, the median LTV ratios are at their lowest during the bubble period in the late 1980s and early 1990s. The counter-cyclicality of LTV ratios is robust to controlling for various characteristics of loans, borrowers, and lenders. We also find that borrowers that obtained high-LTV loans performed no worse ex-post than those with low-LTV loans, and performed better during the bubble period. These findings cast doubt on the conventional wisdom that banks adopted more lax lending standards during the bubble period, although we have other evidence in support of that story. We also draw some implications for the ongoing debate on the use of LTV ratio caps as a macroprudential policy measure.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/25465/1/ifn_wp019.pdf
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Bibliographic Info

Paper provided by Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University in its series Working Paper Series with number 19.

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Length: 65 p.
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:hit:cinwps:19

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Keywords: loan-to-value (LTV) ratios; pro-cyclicality; bubble;

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  1. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
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  7. Goodhart, Ch. A. E. & Kashyap, A. K. & Tsomocos, D. P. & Vardoulakis, A. P., 2012. "Financial Regulation in General Equilibrium," Working papers 372, Banque de France.
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  10. Deniz Igan & Heedon Kang, 2011. "Do Loan-To-Value and Debt-To-Income Limits Work? Evidence From Korea," IMF Working Papers 11/297, International Monetary Fund.
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