Mortgage Constraints: Household Responses, Market Adjustments and Financial Stability

Mortgage constraints are widely used to reduce household leverage, but lower credit volumes alone say little about who bears the cost or whether financial vulnerability falls. We decompose the effect of a mortgage constraint tightening into three components: the direct effect on households, the equilibrium incidence through house prices, rents and credit supply and, finally, the corrective benefit. We use this framework to synthesize household- level, housing-market, lender, cross-country and credit-crisis evidence. The direct effect falls on young and low-wealth households, largely through fewer mortgage originations. Aggregate credit responses are several times larger than mechanically aggregated micro responses, consistent with general equilibrium amplification, although settings and outcomes differ across studies. Quantitative evidence on the corrective benefit is scarce, and few of the 154 tightening episodes we examine occur when credit and house-price growth is high.