The Negative Liquidity Effect of Mortgage Regulation

Knut Are Aastveit, Ragnar Juelsrud and Ella Getz Wold

No 20505, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We use Norwegian data on household balance sheets, housing transactions, and consumption to evaluate the impact of loan-to-value (LTV) regulation. We find that LTV caps do not only reduce leverage, but also liquidity. The negative liquidity effect is stronger for first time buyers and persistent. While average consumption remains unchanged, buyers subject to the cap reduce consumption more following income shocks, consistent with lower liquidity raising the marginal propensity to consume. This effect is concentrated in housing-related spending and is accompanied by a higher likelihood of downscaling, highlighting an unintended consequence of LTV regulation through reduced financial buffers.

Keywords: Macroprudential policy; Mortgage markets; Leverage; Liquidity; Consumption (search for similar items in EconPapers)
JEL-codes: E21 E58 G21 G28 G51 (search for similar items in EconPapers)
Date: 2025-07
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