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Capital requirements, mortgage rates and house prices

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  • Damen, Sven
  • Schildermans, Stef

Abstract

We study the effect of an increase in capital requirements for residential mortgages on mortgage rates and house prices. We exploit a unique quasi-experiment in which affected banks faced an increase in risk weights of five percentage points. Using a difference-in-differences estimator, we find that treated banks increase their mortgage rates by 19 basis points. Houses near affected banks have a 2.38% lower sale price after the increase in capital requirements. Our results imply a semi-elasticity of house prices to changes in mortgage rates of 12.3, in line with predictions from a user cost model.

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  • Damen, Sven & Schildermans, Stef, 2022. "Capital requirements, mortgage rates and house prices," Journal of Banking & Finance, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:jbfina:v:143:y:2022:i:c:s0378426622001923
    DOI: 10.1016/j.jbankfin.2022.106596
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    1. Reusens, Peter & Vastmans, Frank & Damen, Sven, 2023. "A new framework to disentangle the impact of changes in dwelling characteristics on house price indices," Economic Modelling, Elsevier, vol. 123(C).

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