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The impact of a macroprudential borrower based measure on households’ leverage and housing choices

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  • Sónia Félix
  • Daniel Abreu

Abstract

Banco de Portugal implemented new limits to the loan-to-value (LTV) ratio in July 2018. This paper investigates the impact of these new lending limits on households’ leverage and housing choices. Using credit register data that covers the universe of loans granted to households, which allows us to account for loan and households’ characteristics and bank heterogeneity, we document a decline in the LTV ratio after the implementation of the macroprudential measure. Importantly, using a difference-in-differences estimation strategy we estimate the impact of the policy change on households that were more likely to exceed the new LTV limits in the absence of the policy change. Our results show that the policy change was effective in reducing households’ leverage as constrained households take out smaller loans and have lower loan-to-income ratios. These households pay higher interest rate spreads and have higher loan-service-to-income ratios than the control group. This paper also shows that the policy change affected households’ housing choices as constrained households bought cheaper houses. Overall, our results highlight the improvement of the risk profile of households following the introduction of the LTV limits.

Suggested Citation

  • Sónia Félix & Daniel Abreu, 2021. "The impact of a macroprudential borrower based measure on households’ leverage and housing choices," Working Papers w202116, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w202116
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    References listed on IDEAS

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    Cited by:

    1. Hodula, Martin & Melecký, Martin & Pfeifer, Lukáš & Szabo, Milan, 2023. "Cooling the mortgage loan market: The effect of borrower-based limits on new mortgage lending," Journal of International Money and Finance, Elsevier, vol. 132(C).
    2. McCann, Fergal & Durante, Elena, 2022. "The effects of a macroprudential loosening: the importance of borrowers’ choices," Research Technical Papers 9/RT/22, Central Bank of Ireland.

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