Inefficient Regulation: Mortgages versus Total Credit
59 Pages Posted: 28 May 2021 Last revised: 14 Jul 2021
Date Written: July 14, 2021
We study the impact of loan-to-value regulation on supply and demand for unregulated debt that is used for home acquisition. In our setting, part of the dwelling price is in the form of pre-existing debt exempt from the regulation. Variations in the latter prior to the LTV regulation generated exogenous variation in the regulatory requirements across buildings. We find that households, especially constrained ones, start paying more for dwellings financed with more unregulated debt. Our estimates reveal a willingness to pay for alternative home financing of about 250 percent above the prevailing mortgage rate. In the longer run, the supply of unregulated debt increases by almost 50 percent. We corroborate our findings by aggregating evidence from 13 countries.
Keywords: Macroprudential regulation, Loan-to-value (LTV) caps, household financing decisions, house prices
JEL Classification: G18, G28, H31
Suggested Citation: Suggested Citation