Take It to the Limit? The Effects of Household Leverage Caps

48 Pages Posted: 9 Dec 2018 Last revised: 11 Dec 2019

See all articles by Sjoerd van Bekkum

Sjoerd van Bekkum

Erasmus University

Marc Gabarro

University of Mannheim

Rustom M. Irani

University of Illinois at Urbana-Champaign - Department of Finance; Centre for Economic Policy Research (CEPR)

Jose-Luis Peydro

Catalan Institution of Research and Advanced Studies (ICREA); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE); Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)

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Date Written: December 11, 2019

Abstract

We analyze the effects of borrower-based macroprudential policy at the household-level. For identification, we exploit administrative Dutch tax-return and property ownership data linked to the universe of housing transactions, and the introduction of a mortgage loan-to-value limit. The regulation reduces mortgage leverage, with bunching in its limit. Ex-ante more-affected households substantially reduce overall leverage and debt servicing costs but consume greater liquidity to satisfy the regulation. Improvements in household solvency result in less financial distress and, given negative idiosyncratic shocks, better liquidity management. However, fewer households transition from renting into ownership. All of these effects are stronger for liquidity-constrained households.

Keywords: Macroprudential Policy; Residential Mortgages; Solvency vs. Liquidity Tradeoff; Household Leverage; Loan-to-Value Ratio

JEL Classification: E21; E58; G21; G28; G51

Suggested Citation

van Bekkum, Sjoerd and Gabarro, Marc and Irani, Rustom M. and Peydro, Jose-Luis, Take It to the Limit? The Effects of Household Leverage Caps (December 11, 2019). Available at SSRN: https://ssrn.com/abstract=3284670 or http://dx.doi.org/10.2139/ssrn.3284670

Sjoerd Van Bekkum

Erasmus University ( email )

P.O. Box 1738
Rotterdam, NL 3062 PA
Netherlands

Marc Gabarro

University of Mannheim ( email )

Mannheim, 68131
Germany

HOME PAGE: http://https://finance.uni-mannheim.de/home

Rustom M. Irani (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

College of Business
1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://business.illinois.edu/rirani/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jose-Luis Peydro

Catalan Institution of Research and Advanced Studies (ICREA) ( email )

P/ Lluis Companys 23
Barcelona, 08010
Spain

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

HOME PAGE: http://www.barcelonagse.eu/Faculty.php?id=432

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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