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How tightening mortgage credit raises rents and increases inequality in the housing market

Author

Listed:
  • Castellanos, Juan
  • Hannon, Andrew
  • Paz-Pardo, Gonzalo

Abstract

Housing affordability is at the centre of the political debate in many euro area countries. With steadily increasing rents and house prices still high relative to historical standards, many young households, particularly in large cities, are devoting an ever larger share of their income to housing expenses, and are finding it increasingly hard to access their desired size and quality of housing. At the same time, in the aftermath of the global financial crisis, many authorities tightened credit conditions by introducing limits to mortgage debt for banks or for borrowers themselves (borrower-based measures). These interventions were successful in improving financial stability, which was their key objective. In this article we point to an overlooked potential downside of these policies and other restrictive shocks to credit: limiting access to mortgage credit and, therefore, to homeownership, can spill over into the rental market, pushing up rents and having a negative welfare impact on some households – particularly the young and those on low incomes. JEL Classification: D15, E21, E30, E51, G51

Suggested Citation

  • Castellanos, Juan & Hannon, Andrew & Paz-Pardo, Gonzalo, 2025. "How tightening mortgage credit raises rents and increases inequality in the housing market," Research Bulletin, European Central Bank, vol. 127.
  • Handle: RePEc:ecb:ecbrbu:2025:0127:
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    References listed on IDEAS

    as
    1. Viral V. Acharya & Katharina Bergant & Matteo Crosignani & Tim Eisert & Fergal Mccann, 2022. "The Anatomy of the Transmission of Macroprudential Policies," Journal of Finance, American Finance Association, vol. 77(5), pages 2533-2575, October.
    2. Emmanuel Farhi & Iván Werning, 2016. "A Theory of Macroprudential Policies in the Presence of Nominal Rigidities," Econometrica, Econometric Society, vol. 84, pages 1645-1704, September.
    3. van Bekkum, Sjoerd & Gabarro, Marc & Irani, Rustom M. & Peydró, José-Luis, 2024. "The real effects of borrower-based macroprudential policy: Evidence from administrative household-level data," Journal of Monetary Economics, Elsevier, vol. 147(S).
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Credit Conditions; Homeownership; House Prices; Life-cycle; Macroprudential Policy; Rental Prices;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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