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On the Effectiveness of Loan‐to‐Value Regulation in a Multiconstraint Framework
Author(s) -
GRODECKA ANNA
Publication year - 2020
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12623
Subject(s) - loan to value ratio , microdata (statistics) , economics , collateral , debt , monetary economics , value (mathematics) , econometrics , upper and lower bounds , constraint (computer aided design) , loan , microeconomics , actuarial science , finance , mathematics , statistics , mortgage insurance , census , mathematical analysis , population , demography , geometry , casualty insurance , sociology , insurance policy
Models in the infinite horizon macro‐housing literature often assume that borrowers are constrained exclusively by the loan‐to‐value (LTV) ratio. Motivated by the Swedish microdata, I explore an alternative arrangement where borrowers are constrained by a collateral constraint and by a debt‐service‐to‐income ratio. While stricter LTV limits are often considered as a measure to tackle the rise in household indebtedness, I find that policy designed to lower the maximum permissible LTV ratio may actually leave the debt‐to‐GDP ratio unchanged and increase housing prices in equilibrium if borrowers are bound by two constraints at the same time.