Inefficient Regulation: Mortgages versus Total Credit
68 Pages Posted: 28 May 2021 Last revised: 2 Nov 2021
Date Written: Nov 21, 2021
We study the impact of loan-to-value (LTV) regulation on unregulated debt that is used for home acquisition. In our setting, part of the dwelling price is in form of pre-existing debt exempt from the regulation. We exploit cross-sectional variation across buildings in the non-regulated debt to estimate a set of indirect effects of LTV regulation. Our main result is that households start paying more for dwellings financed with more unregulated debt. Our baseline estimates reveal an implicit interest rate on long-term unregulated debt of at least 8.6 percent or three times the prevailing mortgage rate. In the long-term, developers respond by increasing the supply of debt in new housing by about 50 percent. Taken together, our results document several new unintended indirect consequences of LTV regulation. We corroborate our findings by aggregating evidence from 13 countries.
Keywords: Loan-to-value; macroprudential regulation; mortgages; regulatory arbitrage
JEL Classification: D14; G23; G28; G51; R30
Suggested Citation: Suggested Citation