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Managing a Housing Boom

Author

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  • Jason Allen

    (Bank of Canada)

  • Daniel Greenwald

    (MIT)

Abstract

We investigate how macroprudential policies intended to dampen rises in debt and house prices are influenced by segmentation in the housing and mortgage market. We develop a modeling framework with two mortgage submarkets: a government-insured sector with loose LTV limits and tight PTI limits, and an uninsured sector displaying the reverse pattern. This form of heterogeneity is modeled after the Canadian mortgage system, but is common in countries around the world. We find that this segmentation has important consequences for the effectiveness of macroprudential policy. While tightening payment-to-income (PTI) limits is highly effective at dampening a housing boom in a one-sector system, tightening these limits in the insured sector only is much weaker, due to substitutions into the uninsured sector. In contrast, the effect of tightening loan-to-value (LTV) limits in the uninsured sector is strengthened by market segmentation, causing price-rent ratios to fall, while the same tightening in the insured sector would counterproductively cause price-rent ratios to rise.

Suggested Citation

  • Jason Allen & Daniel Greenwald, 2018. "Managing a Housing Boom," 2018 Meeting Papers 1310, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:1310
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    References listed on IDEAS

    as
    1. Carlos Garriga & Finn E. Kydland & Roman Šustek, 2017. "Mortgages and Monetary Policy," Review of Financial Studies, Society for Financial Studies, vol. 30(10), pages 3337-3375.
    2. Elenev, Vadim & Landvoigt, Tim & Van Nieuwerburgh, Stijn, 2016. "Phasing out the GSEs," Journal of Monetary Economics, Elsevier, vol. 81(C), pages 111-132.
    3. Stephanie Johnson & John Mondragon & Anthony DeFusco, 2017. "Regulating Household Leverage," 2017 Meeting Papers 327, Society for Economic Dynamics.
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