The impact of a macroprudential borrower based measure on households’ leverage and housing choices

Banco de Portugal implemented new limits to the loan-to-value (LTV) ratio in July 2018. This paper investigates the impact of these new lending limits on households’ leverage and housing choices. Using credit register data that covers the universe of loans granted to households, which allows us to account for loan and households’ characteristics and bank heterogeneity, we document a decline in the LTV ratio after the implementation of the macroprudential measure. Importantly, using a difference-in-differences estimation strategy we estimate the impact of the policy change on households that were more likely to exceed the new LTV limits in the absence of the policy change. Our results show that the policy change was effective in reducing households’ leverage as constrained households take out smaller loans and have lower loan-to-income ratios. These households pay higher interest rate spreads and have higher loan-service-to-income ratios than the control group. This paper also shows that the policy change affected households’ housing choices as constrained households bought cheaper houses. Overall, our results highlight the improvement of the risk profile of households following the introduction of the LTV limits.