Could Spain be less different? Exploring the effects of macroprudential policy on the house price cycle

Employing an agent-based model of the Spanish housing market, this paper explores the main drivers behind the large amplitude of the Spanish house price cycle —as compared to most other European countries—, as well as the scope for macroprudential policy to reduce this amplitude. First, we exploit the availability of a previous calibration to the UK, which has a less pronounced house price cycle, to show the prominent role played by the distributions of various mortgage risk metrics: loan-to-value, loan-to-income and debt-service-to-income ratios. Second, we use the model to calibrate both a hard loan-to-value limit and a soft loan-to-income limit to smooth the Spanish house price cycle and match the amplitude of the UK equivalent. Finally, we characterise the effects of these calibrated policies over the different phases of the cycle, finding that both instruments reduce credit and price growth during the expansionary phase and also reduce their decline during the contractionary phase. Moreover, both instruments lead to a compositional shift in lending: the loan-to-value policy from first-time buyers to buy-to-let investors and the loan-to-income policy from both first-time buyers and home movers to buy-to-let investors.