A Close Look at Loan-To-Value Ratios: Evidence from the Japanese Real Estate Market

Arito Ono, Hirofumi Uchida, Gregory Udell () and Iichiro Uesugi

No 19, Working Paper Series from Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University

Abstract: Using a unique micro dataset compiled from official real estate registries in Japan, we examine the evolution of loan-to-value (LTV) ratios for business loans over the 1975 to 2009 period, the determinants of these ratios, and the ex post performance of the borrowers. We find that the LTV ratio exhibits counter-cyclicality, implying that the increase (decrease) in loan volumes is smaller than the increase (decrease) in land values during booms (busts). Most importantly, the median LTV ratios are at their lowest during the bubble period in the late 1980s and early 1990s. The counter-cyclicality of LTV ratios is robust to controlling for various characteristics of loans, borrowers, and lenders. We also find that borrowers that obtained high-LTV loans performed no worse ex-post than those with low-LTV loans, and performed better during the bubble period. These findings cast doubt on the conventional wisdom that banks adopted more lax lending standards during the bubble period, although we have other evidence in support of that story. We also draw some implications for the ongoing debate on the use of LTV ratio caps as a macroprudential policy measure.

Keywords: loan-to-value (LTV) ratios; pro-cyclicality; bubble (search for similar items in EconPapers)
JEL-codes: G21 G32 R33 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2013-02
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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