Macroprudential Policy, Mortgage Cycles and Distributional Effects: Evidence from the UK

57 Pages Posted: 22 Sep 2020

See all articles by José-Luis Peydró

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Francesc Rodriguez Tous

Cass Business School

Jagdish Tripathy

Bank of England

Arzu Uluc

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2020

Abstract

Macroprudential regulators worldwide have introduced regulations to limit household leverage in light of existing evidence which suggests that high leverage is associated with household distress during crisis. We analyse the distributional effects of such a macroprudential policy on mortgage and house price cycles. For identification, we exploit the universe of UK mortgages and a 15%-limit imposed in 2014 on lenders—not households—for high loan-to-income ratio (LTI) mortgages. Despite some regulatory arbitrage (e.g. increases in LTV and average loan size), moreconstrained lenders issue fewer high-LTI mortgages. Partial substitution by less-constrained lenders leads to overall credit contraction to low-income borrowers in local-areas more exposed to constrained-lenders, lowering house price growth. Following the Brexit referendum (which led to house-price correction), the 2014-policy strongly implies—via lower pre-correction debt—better house prices and mortgage defaults during an episode of house price correction.

Keywords: Credit cycles, House Prices, inequality, macroprudential policy, Mortgages

JEL Classification: E5, G01, G21, G28, G51

Suggested Citation

Peydro, Jose-Luis and Rodriguez Tous, Francesc and Tripathy, Jagdish and Uluc, Arzu, Macroprudential Policy, Mortgage Cycles and Distributional Effects: Evidence from the UK (September 1, 2020). Available at SSRN: https://ssrn.com/abstract=3696356

Jose-Luis Peydro (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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/

Francesc Rodriguez Tous

Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Jagdish Tripathy

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Arzu Uluc

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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