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The Effect of Credit Constraints on Housing Choices: The Case of LTV limit

Author

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  • Nitzan Tzur-Ilan

    (Bank of Israel)

Abstract

This paper examines the effects of a Loan-to-Value (LTV) limit on households’ choices in the credit and housing markets. Using a large and novel micro database from Israel, including rich information on loans, borrowers and acquired assets, and using matching techniques, I find that the LTV limit had an effect on the mortgage contract terms (higher interest rates), but did not lead to credit rationing (no segment of the population is excluded from the market). The LTV limit induced borrowers to buy cheaper assets and to move farther from high demand areas to lower graded neighborhoods. The conclusion is that the LTV limit, the most common macroprudential policy tool, has an impact not only from a financial stability perspective, by reducing the leverage of households, but also affected their choices in the housing market.

Suggested Citation

  • Nitzan Tzur-Ilan, 2017. "The Effect of Credit Constraints on Housing Choices: The Case of LTV limit," Bank of Israel Working Papers 2017.03, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2017.03
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    References listed on IDEAS

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    Cited by:

    1. Mokas, Dimitris & Giuliodori, Massimo, 2023. "Effects of LTV announcements in EU economies," Journal of International Money and Finance, Elsevier, vol. 133(C).
    2. de Araujo, Douglas Kiarelly Godoy & Barroso, Joao Barata Ribeiro Blanco & Gonzalez, Rodrigo Barbone, 2020. "Loan-to-value policy and housing finance: Effects on constrained borrowers," Journal of Financial Intermediation, Elsevier, vol. 42(C).
    3. Ángel Estrada & Christian Castro, 2021. "Function and application of the new macroprudential tools available to the Banco de España," Financial Stability Review, Banco de España, issue Spring.
    4. Ángel Estrada & Christian Castro, 2021. "Function and application of the new macroprudential tools available to the Banco de España," Financial Stability Review, Banco de España, issue Spring.
    5. Nitzan Tzur-Ilan, 2018. "LTV Limits and Borrower Risk," Bank of Israel Working Papers 2018.12, Bank of Israel.
    6. Natalya Presman & Nitzan Tzur-Ilan, 2019. "Does Location Matter? Evidence on Differential Mortgage Pricing in Israel," Bank of Israel Working Papers 2019.14, Bank of Israel.
    7. 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).

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    More about this item

    Keywords

    LTV; macroprudential; mortgages; housing; regulation; central; banks;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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