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On the Effectiveness of Loan‐to‐Value Regulation in a Multiconstraint Framework

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  • ANNA GRODECKA

Abstract

Models in the infinite horizon macro‐housing literature often assume that borrowers are constrained exclusively by the loan‐to‐value (LTV) ratio. Motivated by the Swedish microdata, I explore an alternative arrangement where borrowers are constrained by a collateral constraint and by a debt‐service‐to‐income ratio. While stricter LTV limits are often considered as a measure to tackle the rise in household indebtedness, I find that policy designed to lower the maximum permissible LTV ratio may actually leave the debt‐to‐GDP ratio unchanged and increase housing prices in equilibrium if borrowers are bound by two constraints at the same time.

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  • Anna Grodecka, 2020. "On the Effectiveness of Loan‐to‐Value Regulation in a Multiconstraint Framework," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(5), pages 1231-1270, August.
    • Handle: RePEc:wly:jmoncb:v:52:y:2020:i:5:p:1231-1270
    DOI: 10.1111/jmcb.12623
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    1. repec:zbw:bofrdp:2020_009 is not listed on IDEAS
    2. Kärkkäinen, Samu & Nyholm, Juho, 2021. "Economic effects of a debt-to-income constraint in Finland: Evidence from Aino 3.0 model," BoF Economics Review 1/2021, Bank of Finland.
    3. Bäckman, Claes & Khorunzhina, Natalia, 2020. "Interest-Only Mortgages and Consumption Growth: Evidence from a Mortgage Market Reform," MPRA Paper 98524, University Library of Munich, Germany.
    4. Silvo, Aino & Verona, Fabio, 2020. "The Aino 3.0 model," Research Discussion Papers 9/2020, Bank of Finland.
    5. Jiaqian Chen & Daria Finocchiaro & Jesper Linde & Karl Walentin, 2023. "The costs of macroprudential deleveraging in a liquidity trap"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 991-1011, December.
    6. Anna Grodecka, 2020. "On the Effectiveness of Loan‐to‐Value Regulation in a Multiconstraint Framework," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(5), pages 1231-1270, August.
    7. Gennaro Catapano & Francesco Franceschi & Valentina Michelangeli & Michele Loberto, 2021. "Macroprudential Policy Analysis via an Agent Based Model of the Real Estate Sector," Temi di discussione (Economic working papers) 1338, Bank of Italy, Economic Research and International Relations Area.
    8. Kelly, Robert & Mazza, Elena, 2019. "A Measure of Bindingness in the Irish Mortgage Market," Financial Stability Notes 12/FS/19, Central Bank of Ireland.
    9. Ibrahima Sangaré, 2019. "Housing sector and optimal macroprudential policy in an estimated DSGE model for Luxembourg," BCL working papers 129, Central Bank of Luxembourg.
    10. Koetter, Michael & Marek, Philipp & Mavropoulos, Antonios, 2021. "Real estate transaction taxes and credit supply," Discussion Papers 04/2021, Deutsche Bundesbank.
    11. Barasinska, Nataliya & Ludwig, Johannes & Vogel, Edgar, 2021. "The impact of borrower-based instruments on household vulnerability in Germany," Discussion Papers 20/2021, Deutsche Bundesbank.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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