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The impact of mortgage regulation on homeownership and household leverage: Evidence from Finland's LTV reform

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  • Eerola, Essi
  • Lyytikäinen, Teemu
  • Ramboer, Sander

Abstract

This paper examines the impact of a limit on loan-to-value (LTV) ratios implemented in Finland in 2016. Focusing on households that buy an apartment for the first time, we evaluate how the regulation influenced household leverage and the decision to become a homeowner. Through bunching analysis, the reform is estimated to have reduced transitions into homeownership by 17% among borrowers potentially affected by the reform. This corresponds to an 8% reduction in the total amount of first-time apartment buyers. The reduction in transitions to homeownership is found to be driven by households with below median income, suggesting that the regulation may have important consequences for the distribution of wealth. An additional 8% of potentially affected households reduced their LTV ratios to below the limit. Differences-in-differences analysis, comparing those expected to have LTV ratios above the limit to those below the limit, indicates that the reduction in mortgage debt was accompanied by an increase in other debt.

Suggested Citation

  • Eerola, Essi & Lyytikäinen, Teemu & Ramboer, Sander, 2022. "The impact of mortgage regulation on homeownership and household leverage: Evidence from Finland's LTV reform," Working Papers 148, VATT Institute for Economic Research.
    • Handle: RePEc:fer:wpaper:148
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    More about this item

    Keywords

    macroprudential policy; mortgage regulation; loan-to-value ratio; household leverage; homeownership; housing demand; Local public finance and provision of public services; Social security; taxation and inequality; G28; G51; R21; R28; fi=Asuntopolitiikka|sv=Bostadspolitik|en=Housing policy|;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy

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