The Effect of LTV-Based Risk Weights on House Prices: Evidence from an Israeli Macroprudential Policy

37 Pages Posted: 20 Dec 2018 Last revised: 23 Dec 2019

Date Written: June 18, 2019

Abstract

This paper studies the link between bank mortgage lending and house prices by asking whether macroprudential policies that impose higher risk weights on high LTV mortgages can slow house price growth. For housing units likely to be purchased using mortgages subject to the higher risk weights, we estimate that prices are lower by about 2 to 3 percent than they would have been without the policy. We find that the policy has larger effects in more expensive areas of the country and, in particular, in lower quality neighborhoods within these more expensive areas. Combining our results with previous estimates of the effect of this policy on mortgage interest rates, we derive an estimate for the semi-elasticity of house prices with respect to mortgage rates that is consistent with the upper range of estimates reported in the literature.

Keywords: House Prices, Macroprudential Policy, LTV-Based Risk Weights, Mortgages

JEL Classification: G28, R31

Suggested Citation

Laufer, Steven and Tzur-Ilan, Nitzan, The Effect of LTV-Based Risk Weights on House Prices: Evidence from an Israeli Macroprudential Policy (June 18, 2019). Available at SSRN: https://ssrn.com/abstract=3297797 or http://dx.doi.org/10.2139/ssrn.3297797

Steven Laufer

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-475-6608 (Phone)
202-728-5889 (Fax)

Nitzan Tzur-Ilan (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Bank of Israel ( email )

P.O. Box 780
Jerusalem, 91907
Israel

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