Paper #1682

Title:

Take It to the limit? The effects of household leverage caps

Authors:

Sjoerd Van Bekkum, Marc Gabarro, Rustom M. Irani and José-Luis Peydró

Date:

November 2019 (Revised: February 2022)

Abstract:

We analyze the effects of borrower-based macroprudential policy at the household-level. For identification, we exploit administrative Dutch tax-return and property data linked to the universe of housing transactions, and an introduction of loan-to-value regula- tion. The regulation reduces overall household leverage, with bunching in its limit. Ex- ante more-affected households substantially reduce leverage and debt servicing costs. Rather than buying cheaper homes or taking lightly-regulated loans, households con- sume greater liquidity to satisfy the regulation. Improvements in household solvency result in less financial distress and, given negative idiosyncratic shocks, better liquidity management. However, fewer households transition from renting into ownership. These effects are stronger among liquidity-constrained households.

Keywords:

Macroprudential policy; financial regulation; residential mortgages; household finance; household leverage; loan-to-value ratio

JEL codes:

D14; D31; E21; E58; G21; G28

Area of Research:

Macroeconomics and International Economics

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