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The Negative Liquidity Effect of Mortgage Regulation

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  • Aastveit, Knut Are
  • Juelsrud, Ragnar
  • Getz Wold, Ella

Abstract

We use Norwegian data on household balance sheets, housing transactions, and consumption to evaluate the impact of loan-to-value (LTV) regulation. We find that LTV caps do not only reduce leverage, but also liquidity. The negative liquidity effect is stronger for first time buyers and persistent. While average consumption remains unchanged, buyers subject to the cap reduce consumption more following income shocks, consistent with lower liquidity raising the marginal propensity to consume. This effect is concentrated in housing-related spending and is accompanied by a higher likelihood of downscaling, highlighting an unintended consequence of LTV regulation through reduced financial buffers.

Suggested Citation

  • Aastveit, Knut Are & Juelsrud, Ragnar & Getz Wold, Ella, 2025. "The Negative Liquidity Effect of Mortgage Regulation," CEPR Discussion Papers 20505, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20505
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    File URL: https://cepr.org/publications/DP20505
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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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