The aggregate and distributional implications of credit shocks on housing and rental markets

Gonzalo Paz-Pardo, Juan Castellanos and Andrew Hannon

No 2977, Working Paper Series from European Central Bank

Abstract: We build a model of the aggregate housing and rental markets in which houseprices and rents are determined endogenously. Households can choose their housingtenure status (renters, homeowners, or landlords) and the size of their homes dependingon their age, income and wealth. We use our model to study the impact of changesin credit conditions on house prices, rents and household welfare. We analyse theintroduction of policies that limited loan-to-value (LTV) and loan-to-income (LTI) ratiosof newly originated mortgages in Ireland in 2015 and find that, consistent with empiricalevidence, they mitigate house price growth but increase rents. Homeownership ratesdrop, and young and middle-income households are negatively affected by the reform.An unexpected permanent rise in real interest rates has similar effects – by makingmortgages more expensive and alternative investments more attractive for landlords, itincreases rents relative to house prices. JEL Classification: D15, E21, E30, E51, G51

Keywords: credit conditions; homeownership; house prices; life-cycle; macro-prudential policy; rental prices (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-dge and nep-ure
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