The impact of mortgage regulation on homeownership and household leverage: Evidence from Finland's LTV reform

Essi Eerola, Teemu Lyytikäinen and Sander Ramboer

No 148, Working Papers from VATT Institute for Economic Research

Abstract: This paper examines the impact of a limit on loan-to-value (LTV) ratios implemented in Finland in 2016. Focusing on households that buy an apartment for the first time, we evaluate how the regulation influenced household leverage and the decision to become a homeowner. Through bunching analysis, the reform is estimated to have reduced transitions into homeownership by 17% among borrowers potentially affected by the reform. This corresponds to an 8% reduction in the total amount of first-time apartment buyers. The reduction in transitions to homeownership is found to be driven by households with below median income, suggesting that the regulation may have important consequences for the distribution of wealth. An additional 8% of potentially affected households reduced their LTV ratios to below the limit. Differences-in-differences analysis, comparing those expected to have LTV ratios above the limit to those below the limit, indicates that the reduction in mortgage debt was accompanied by an increase in other debt.

Keywords: macroprudential policy; mortgage regulation; loan-to-value ratio; household leverage; homeownership; housing demand; Local public finance and provision of public services; Social security; taxation and inequality; G28; G51; R21; R28; fi=Asuntopolitiikka|sv=Bostadspolitik|en=Housing policy| (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-ban, nep-cba and nep-ure
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