Effectiveness of Loan-to-Value Ratio Policy and Its Transmission Mechanism: Empirical Evidence from Hong Kong

30 Pages Posted: 7 Dec 2017

See all articles by Eric Wong

Eric Wong

Hong Kong Monetary Authority - Market Research Division

Kelvin Ho

Hong Kong Monetary Authority

Andrew Tsang

Hong Kong Monetary Authority

Date Written: July 1, 2015

Abstract

This paper provides a non-technical summary of two recent empirical studies to shed light on key important issues regarding the implementation of loan-to-value (LTV) policy as a macroprudential tool, including its effectiveness, potential drawbacks and its transmission mechanism to improve financial stability. Empirical evidence suggests that LTV policy is effective in reducing systemic risk associated with boom-and-bust cycles in property markets. Although the LTV policy may be associated with higher liquidity constraints on homebuyers, we show that the mortgage insurance program (MIP) can mitigate this drawback without undermining the effectiveness of LTV policy. Thus, MIPs play an important role in enhancing the net benefits of LTV policy. Concerning the transmission mechanism, empirical evidence suggests that the policy pass-through to property market activities may be weak. By contrast, there is clear evidence that tightening the LTV cap would reduce household leverage and credit growth, and that lower leverage plays a major role in strengthening banks’ resilience to property price shocks. This finding supports the view that household leverage would be an optimal target of LTV policy.

Suggested Citation

Wong, Eric and Ho, Kelvin and Tsang, Andrew, Effectiveness of Loan-to-Value Ratio Policy and Its Transmission Mechanism: Empirical Evidence from Hong Kong (July 1, 2015). Journal of Financial Perspectives, Vol. 3, No. 2, 2015, Available at SSRN: https://ssrn.com/abstract=3083548

Eric Wong (Contact Author)

Hong Kong Monetary Authority - Market Research Division

Hong Kong

Kelvin Ho

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central,
Hong Kong
Hong Kong

Andrew Tsang

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre
Hong Kong
Hong Kong

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