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

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 micro-data, I explore an alternative arrangement where borrowers are constrained by the feasibility of repayment, but choose a house of maximum permissible size conditional on the LTV restriction. 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. In a model with occasionally binding constraints, I show that also for the analysis of the short-run effects of different policies, the consideration of multiple constraints, possibly binding at the same time, is important. The effectiveness of LTV as a measure to tackle the rise in indebtedness has to be reassessed and is likely lower than previously shown.

The Costs of Macroprudential Deleveraging in a Liquidity Trap

“…LTV while no analogous bunching is visible in the LTI dimension. This observation is also consistent with the microdata in Grodecka (2020) which show that, during 2011-2015, 60%…”

“…As a robustness check, we therefore compare our two main macroprudential tools when the LTI and LTV constraints bind at the same time. Even so, it is important to keep in mind that LTV and LTI constraints bind jointly for only a subset of the borrowers; for Sweden Grodecka (2020) reports that the case pertains to 14 percent of the borrowers. Nevertheless, the results in this section show that our conclusions are una¤ected even for this unusual case: an LTV tightening is still more contractionary than a tightening of the LTI constraint.…”

The Impact of Borrower-Based Instruments on Household Vulnerability in Germany

“…In a related paper, Korinek and Sandri (2016) demonstrate that in advanced economies macroprudential policies that restrict borrowing are also needed to mitigate fire sales and asset price volatility. Other theoretical papers integrate borrower-based instruments into full-blown macro models at the expense of ignoring the distributional effects of potential credit restrictions (Gerali et al 2010;Grodecka 2019). Heterogeneous agent models such as Iacoviello and Pavan (2013) model heterogeneity and macroeconomic effects jointly.…”

Real Estate Transaction Taxes and Credit Supply

“…Understanding the (in)ability of scal policy to curtail mortgage lending is important because many historical nancial crises were preceded by housing booms (Reinhart and Rogo, 2008;Brunnermeier and Schnabel, 2016). Whereas these events triggered the launch of novel macroprudential policy tools to contain excessive (mortgage) borrowing, such as loan-to-value (LTV) caps, their eectiveness remains ambiguous (Grodecka, 2020). We propose a formal relationship between tax changes and LTV caps and provide evidence on how the scal policy mechanism can impact mortgage credit as a historically important driver of nancial instability.…”