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How do macroprudential loan-to-value restrictions impact first time home buyers? A quasi-experimental approach

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  • Kinghan, Christina
  • McCarthy, Yvonne
  • O’Toole, Conor

Abstract

In this paper, we analyse the effect of the introduction of macroprudential limits on loan-to-value ratios on the borrowing behaviour of first-time-home-buyers in Ireland. Observing lending activity pre- and post- the unanticipated introduction of the regulations in 2015, we estimate the direct effect of the regulations on first-time-buyer leverage and house purchasing decisions. We exploit a unique provision in the macroprudential framework, that places different loan-to-value limits on properties above and below a fixed house price (€ 220,000), to determine the causal effect of the macroprudential measures on this group of borrowers. We find that LTVs fell by approximately 1.4 percentage points after the measures, with larger reductions recorded for high income borrowers. We also find that borrowers increased their downpayments in response to the regulations, with no change in the house price paid. However, findings differ across the income distribution, indicating the impact of wealth constraints on borrower behaviour. This research reinforces the importance of using granular data to understand the impact of loan-to-value regulations.

Suggested Citation

  • Kinghan, Christina & McCarthy, Yvonne & O’Toole, Conor, 2022. "How do macroprudential loan-to-value restrictions impact first time home buyers? A quasi-experimental approach," Journal of Banking & Finance, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:jbfina:v:138:y:2022:i:c:s0378426619302523
    DOI: 10.1016/j.jbankfin.2019.105678
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    Cited by:

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    2. Varadi, Alexandra, 2024. "Identifying the transmission channels of credit supply shocks to household debt: Price and non-price effects," European Economic Review, Elsevier, vol. 166(C).

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    More about this item

    Keywords

    Mortgages; Macroprudential regulation; Leverage; Loan-to-Value;
    All these keywords.

    JEL classification:

    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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