Housing Assistance Policy for Mortgage Borrowers: Liquidity Improvements or Price Acceleration?

Abstract

Public subsidies to support the downpayments of mortgaged home purchasers can be absorbed in the housing market in a number of ways. Using granular data on loans and borrowers in Ireland, we assess three possible transmission channels of an enhancement to subsidy payments introduced in mid-2020: borrowers’ liquidity, equity (or indebtedness), and home purchase values. Our estimates suggests that out-of-pocket downpayments fall by almost the size of the increase in the subsidy value, suggesting improvement in liquidity position of eligible borrowers. We also find that this liquidity improving effect is present across all income levels, but highest in the middle of the borrower income distribution. Equity enhancements (lowering Loan-to-value ratios) and house price increases are smaller in magnitude and more prevalent among higher income borrowers.

Keywords: housing assistance schemes, macroprudential policy, borrower liquidity, Downpayment constraint