Inefficient Regulation: Mortgages versus Total Credit

68 Pages Posted: 28 May 2021 Last revised: 2 Nov 2021

See all articles by Artashes Karapetyan

Artashes Karapetyan

ESSEC Business School

Jens Kvaerner

Tilburg University

Maximilian Rohrer

NHH - Norwegian School of Economics

Date Written: Nov 21, 2021

Abstract

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

Karapetyan, Artashes and Kvaerner, Jens and Rohrer, Maximilian, Inefficient Regulation: Mortgages versus Total Credit (Nov 21, 2021). Available at SSRN: https://ssrn.com/abstract=3854860 or http://dx.doi.org/10.2139/ssrn.3854860

Artashes Karapetyan (Contact Author)

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

Jens Kvaerner

Tilburg University ( email )

Warandelaan 2
Tilburg, -- 4818HK
Norway
40242704 (Phone)
0364 (Fax)

HOME PAGE: http://www.jenskvaerner.com/

Maximilian Rohrer

NHH - Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway

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