Mortgage regulation and financial vulnerability at the household level

Knut Are Aastveit, Ragnar Juelsrud and Ella Getz Wold

No 2020/6, Working Paper from Norges Bank

Abstract: We evaluate the impact of mortgage regulation on credit volumes, household balance sheets and the reaction to adverse economic shocks. Using a comprehensive dataset of all housing transactions in Norway matched with buyers' balance sheet information from official tax records, we identify causal effects of mortgage loan-to-value (LTV) limits. Our results show that LTV-requirements have substantial effects on credit volumes, especially on the extensive margin. As a result, such requirements contribute to dampening aggregate credit growth. We find that affected households lower their debt uptake and face lower interest expenses, thereby reducing their vulnerability to adverse shocks. However, affected households also deplete liquid assets when purchasing a home, in order to meet the new requirement. This negative effect on liquid savings persists in the years following the house purchase, suggesting that the impact on financial vulnerability at the household level is in fact ambiguous. We illustrate this further by documenting that households affected by the regulation are more likely to sell their home when becoming unemployed compared to non-affected households.

Keywords: household leverage; financial regulation; macroprudential policy; mortgage markets (search for similar items in EconPapers)
JEL-codes: E21 E58 G21 G28 G51 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2020-06
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cba, nep-eur, nep-mac and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2020_06

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