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How Does Loan-To-Value Policy Strengthen Resilience of Banks to Property Price Shocks - Evidence from Hong Kong

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  • Eric Wong

    (Hong Kong Monetary Authority)

  • Andrew Tsang

    (Hong Kong Monetary Authority)

  • Steven Kong

    (Hong Kong Monetary Authority)

Abstract

This paper sheds light on the transmission mechanism of a loan-to-value (LTV) policy to financial stability by providing three findings from Hong Kong. First, there is evidence that LTV cap tightening since 2009 has dampened both the leverage of borrowers and credit growth, and that lower leverage has played a major role in strengthening the resilience of banks to property price shocks. Second, the effect on loan growth is found to be state-dependent due to loan market disequilibrium, with a much stronger impact on loan supply than demand, which suggests that calibrating this tool to curb loan growth requires an accurate estimate of both loan demand and supply. Operationally, this could pose challenges for policymakers. Finally, we find evidence of the low responsiveness of housing demand to caps on LTV ratios, which is suggestive of the weak direct pass-through rate of the LTV policy to the property market. These findings together support the view that it would be operationally optimal for the LTV policy to primarily target household leverage, and that there are limitations in using this instrument to stabilise credit growth and property prices.

Suggested Citation

  • Eric Wong & Andrew Tsang & Steven Kong, 2016. "How Does Loan-To-Value Policy Strengthen Resilience of Banks to Property Price Shocks - Evidence from Hong Kong," International Real Estate Review, Global Social Science Institute, vol. 19(1), pages 120-149.
    • Handle: RePEc:ire:issued:v:19:n:01:2016:p:120-149
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    4. Tommy Wu & Michael Cheng & Ken Wong, 2017. "Bayesian analysis of Hong Kong's housing price dynamics," Pacific Economic Review, Wiley Blackwell, vol. 22(3), pages 312-331, August.

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    More about this item

    Keywords

    Banking; Disequilibrium; Hong Kong; Loan-To-Value; Macroprudential Policy;
    All these keywords.

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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