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Aggregate and Distributional Impacts of LTV Policy in China

Author

Listed:
  • Kaiji Chen
  • Qing Wang
  • Tong Xu
  • Tao Zha

Abstract

We study how China’s loan-to-value (LTV) policy affects mortgage markets and household consumption, focusing on an abrupt and unprecedented relaxation in LTV limits for secondary houses from 2014Q4 to 2016Q3. Using a rich dataset of over three million loan-level records from a major Chinese commercial bank, supplemented by survey data on urban household finances, we analyze how this policy shift influenced mortgage demand, house prices, and consumption across household groups and at the aggregate level. We find that this LTV relaxation, aimed at promoting housing investments, spurred a mortgage boom, especially in primary home mortgages, while crowding out household consumption among middle-aged, high-education households. Motivated by these findings, we develop and calibrate a dynamic equilibrium model that distinguishes between primary homes for housing services and secondary houses for investment. When the LTV limit for secondary houses is relaxed, demand for these properties surges, increasing house prices and capital gains. Unlike prior literature, we identify a housing investment channel in which these capital gains enable existing homeowners---particularly middle-aged and high-income households---to upsize their primary residences. Rising house prices then drive further demand and mortgage borrowing, amplifying the effects of the LTV policy change and reducing these households' non-housing consumption.

Suggested Citation

  • Kaiji Chen & Qing Wang & Tong Xu & Tao Zha, 2020. "Aggregate and Distributional Impacts of LTV Policy in China," NBER Working Papers 28092, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28092
    Note: AP EFG ME PE
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    Cited by:

    1. Deng, Yuanyuan & Fang, Hanming & Hanewald, Katja & Wu, Shang, 2023. "Delay the Pension Age or Adjust the Pension Benefit? Implications for Labor Supply and Individual Welfare in China," Journal of Economic Behavior & Organization, Elsevier, vol. 212(C), pages 1192-1215.
    2. Yuting BAI & Jun Hyung KIM & Anqi LI & Shiko MARUYAMA & Zhe YANG, 2025. "A House for My Family: The impacts of down payment rate on marriage and fertility," Discussion papers 25056, Research Institute of Economy, Trade and Industry (RIETI).
    3. Francesco Caloia, 2022. "Borrower-Based Measures, House Prices and Household Debt," Working Papers 738, DNB.
    4. Rongsheng Tang & Yang Tang & Rongjie Zhang, 2024. "The Aggregate and Distributional Impacts of Residence Policy Relaxation," The Journal of Real Estate Finance and Economics, Springer, vol. 69(2), pages 343-376, August.
    5. Fan, Gang-Zhi & Li, Han & Li, Jiangyi & Zhang, Jian, 2022. "Housing property rights, collateral, and entrepreneurship: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 143(C).
    6. Hu, Zhining, 2022. "Six types of government policies and housing prices in China," Economic Modelling, Elsevier, vol. 108(C).
    7. Wang, Yin-Chi & Liao, Pei-Ju & Wang, Ping & Yip, Chong Kee, 2024. "To stay or to migrate? When Becker meets Harris-Todaro," European Economic Review, Elsevier, vol. 169(C).

    More about this item

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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