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Do Financial Constraints Cool a Housing Boom?

Author

Listed:
  • Lu Han

    (Rotman School of Management, University of Toronto)

  • Chandler Lutz

    (Department of Economics, Copenhagen Business School)

  • Benjamin Sand

    (Department of Economics, York University)

  • Derek Stacey

    (Department of Economics, Ryerson University)

Abstract

We study the housing market implications of financial constraints by exploiting a regulatory change that withholds access to mortgage insurance when homes sell for $1 million or more, effectively increasing the downpayment requirement at the threshold. We motivate our listing and sales price analysis by advancing a model of competing auctions with constrained bidders. Using Toronto data, we find sharp excess bunching for homes listed but not sold at $1M, along with changes to bidding intensity around the $1M threshold. Everything considered, our analysis points to the importance of designing macroprudential policies that recognize the strategic responses of market participants.

Suggested Citation

  • Lu Han & Chandler Lutz & Benjamin Sand & Derek Stacey, 2018. "Do Financial Constraints Cool a Housing Boom?," Working Papers 073, Toronto Metropolitan University, Department of Economics.
    • Handle: RePEc:rye:wpaper:wp073
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    2. Allen, Jason & Grieder, Timothy & Peterson, Brian & Roberts, Tom, 2020. "The impact of macroprudential housing finance tools in canada," Journal of Financial Intermediation, Elsevier, vol. 42(C).
    3. Kiana Basiri & Babak Mahmoudi & Chenggang Zhou, 2023. "Who benefits the most? Risk pooling in mortgage loan insurance: Evidence from the Canadian mortgage market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(2), pages 311-337, March.
    4. Nitzan Tzur-Ilan, 2018. "LTV Limits and Borrower Risk," Bank of Israel Working Papers 2018.12, Bank of Israel.
    5. Kinghan, Christina & McCarthy, Yvonne & O’Toole, Conor, 2022. "How do macroprudential loan-to-value restrictions impact first time home buyers? A quasi-experimental approach," Journal of Banking & Finance, Elsevier, vol. 138(C).
    6. Gerth, Florian & Temnov, Grigory, 2021. "New Ways of Modeling Loan-to-Income Distributions and their Evolution in Time - A Probability Copula Approach," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 217-236.

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