Designing Macro-prudential Policy in Mortgage Lending: Do First Time Buyers Default Less?

Macro-prudential policy is designed to address risk at a systemwide level, an example of which is mortgage default following a period of excessive residential property lending. Policy tools to address this risk, such as caps on loan-to-value (LTV) and loan-to-income (LTI) ratios should by design reflect the risk profile of lending. This research considers the heterogeneity of default risk between first time buyers and second and subsequent buyers and finds that first time buyers have lower default rates having controlled for borrower and loan characteristics. The potential implications for the macro prudential policy setting are empirically analysed: the default-differential between the two groups linearly increases with LTI and a non-linear difference is found to be maximised at 80-85 per cent for LTV. In addition, the role for a rule designed on house valuation is examined, with results showing a diminishing default-differential as valuations increase. This research is consistent with differential regulatory treatment of first time buyers with default risk remaining comparable to the remainder of mortgage lending.