On the Effectiveness of Loan-to-Value Regulation in a Multiconstraint Framework

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Abstract

Models in the infinite horizon macro-housing literature often assume that borrowers are constrained exclusively by the loan-to-value (LTV) ratio. Motivated by the Swedish microdata, I explore an alternative arrangement where borrowers are constrained by a collateral constraint and by a debt-service-to-income ratio. While stricter LTV limits are often considered as a measure to tackle the rise in household indebtedness, I find that policy designed to lower the maximum permissible LTV ratio may actually leave the debt-to-GDP ratio unchanged and increase housing prices in equilibrium if borrowers are bound by two constraints at the same time.

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Subject classification (UKÄ) – MANDATORY

  • Economics

Keywords

  • borrowing constraints, debt to GDP, debt-service-to-income ratio, E32, E44, E58, G21, household indebtedness, loan-to-value ratio, macroprudential policy, occasionally binding constraints, R21
Original languageEnglish
JournalJournal of Money, Credit and Banking
Publication statusE-pub ahead of print - 2019 May 16
Publication categoryResearch
Peer-reviewedYes