Inefficient Regulation: Mortgages versus Total Credit

Abstract

We estimate the willingness-to-pay to bypass a loan-to-value (LTV) cap. Our identification relies on exogenous variation in debt exempt from the LTV regulation that can only be used as a substitute for a personal mortgage. Our baseline estimate reveals that homebuyers pay 7.3 SEK to avoid 1 SEK of equity down payment. The supply of debt not part of the LTV calculation increased by approximately 50% within two years after the LTV regulation. Financially weaker households drive the results.

Keywords: Loan-to-value; macroprudential regulation; mortgages; regulatory arbitrage

JEL Classification: D14; G23; G28; G51; R30