On the effectiveness of loan-to-value regulation in a multiconstraint framework

Anna Grodecka-Messi

No 347, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

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.

Keywords: borrowing constraints; household indebtedness; macroprudential policy; housing prices; loan-to-value ratio; debt-service-to-income ratio (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 R21 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2017-11-01
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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