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
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: Suggested Citation