The Unintended Effects of Relaxing Targeted Credit Constraints in the Housing Market: Empirical Evidence from Hong Kong

Housing assets and mortgage loans play an essential role in household financial well-being and macroeconomic stability. The central role of credit conditions in the mortgage debt-service channel makes it an appealing macroprudential instrument for government interventions in the housing market. Despite the potentially salient policy implications, micro-level empirical evidence on the relationship between credit conditions and house prices in practice is scarce and mixed. In addition, “targeted” housing policies that intervene in a specific market segment have begun to attract increasing academic attention. This study fills the gap in related literature by investigating the causal effects of relaxing credit constraints targeted at a particular market segment on housing dynamics. Exploiting plausibly exogenous variation in down payment constraints caused by mortgage insurance program (MIP) amendments in 2019 as a quasi-experiment, we evaluate the unintended market responses and strategic behaviors using difference-in-difference (DID) and bunching regression. We present the main findings based on property-level transaction data in Hong Kong residential market. First, relaxing credit constraints in the targeted market segment significantly increases home sales and prices for properties within the affected price ranges. Besides, such direct stimulus effects in targeted segments are pronounced and persistent during our sample period. We further scrutinize the market clearing process with search frictions and endogenous entry of broad searchers to rationale such positive policy effects. Second, we provide empirical evidence that targeted policies have unexpected and far-reaching spillover effects on neighboring segments triggered by derived demand for moving up housing ladders. Specifically, we explain why the initial segment-specific demand shocks trigger the housing ladder effects and moving chains. The derived demand from the housing ladder transition can be attributed to (i) a relaxation in ex-post financing constraints due to credit-driven housing appreciation and (ii) an increase in the ability to sell current homes of mismatched homeowners attempting to move. Our findings suggest that housing stimulus programs may be justified due to their welfare-enhancing role of general equilibrium effects, particularly in a cold market where the equilibrium is far from efficient due to illiquidity and frictions. Third, we exploit the exogenous policy-induced sharp discontinuity in required down payments around the MIP eligibility threshold to identify the local behavioral responses of households by using the bunching regression. We find a substantial “diffuse bunch-ing” excess mass just above the notch and a visible missing mass just above the notch. Besides, we find empirical evidence that households behave strategically to qualify the MIP through tacit collusive agreements on underreporting sales prices. Our analysis has implications that policymakers should account for the strategic behaviors of market participants when designing macroprudential policies. This study contributes to related literature by showing how relaxing down payment constraints targeting a specific segment operate in practice. It provides a better understanding of the direct impact of targeted housing policies and general equilibrium effects. Specifically, our research contributes to a broader literature on spillover effects across housing market segments triggered by housing ladder transitions, which inspires further research to consider segmented markets and multiple equilibria. Moreover, by studying the degree of bunching behaviors at the eligibility threshold of amended MIP, our research sheds new light on the strategic behaviors in designing the macroprudential policies or other government interventions, as the strategic behaviors might distort the policy effects and induce unintended consequences.