Take It to the Limit? The Effects of Household Leverage Caps
47 Pages Posted: 9 Dec 2018 Last revised: 16 May 2023
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Take It to the Limit? The Effects of Household Leverage Caps
Take it to the Limit? The Effects of Household Leverage Caps
Date Written: May 16, 2023
Abstract
We analyze the effects of borrower-based macroprudential policy at the household level. We exploit administrative Dutch tax and housing records, and the introduction of a mortgage loan-to-value (LTV) limit. The regulation reduces homeownership. Among (regulation) affected-households, mortgage leverage falls with bunching at the LTV limit. While affected-households reduce total leverage and interest expenses, they also reduce cash balances to satisfy the limit, generating a solvency-liquidity tradeoff. More- over, affected-households experience less financial distress, and better liquidity management and smoother consumption following income loss. Finally, tracking individual households’ long-term wealth accumulation, the LTV regulation reduces wealth’s volatility, notably, by improving left-tail returns.
Keywords: Macroprudential Policy; Residential Mortgage; Household Leverage; Loan-to-Value Ratio; Solvency-Liquidity Trade-Off; Consumption Smoothing; Financial Exclusion
JEL Classification: E21; E58; G21; G28; G51
Suggested Citation: Suggested Citation