Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 347: On the effectiveness of loan-to-value regulation in a multiconstraint framework

Anna Grodecka ()
Additional contact information
Anna Grodecka: Financial Stability Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: 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 micro-data, I explore an alternative arrangement where borrowers are constrained by the feasibility of repayment, but choose a house of maximum permissible size conditional on the LTV restriction. 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. In a model with occasionally binding constraints, I show that also for the analysis of the short-run effects of different policies, the consideration of multiple constraints, possibly binding at the same time, is important. The effectiveness of LTV as a measure to tackle the rise in indebtedness has to be reassessed and is likely lower than previously shown.

Keywords: borrowing constraints; household indebtedness; macroprudential policy; housing prices; loan-to-value ratio; debt-service-to-income ratio

JEL-codes: E32; E44; E58; R21

52 pages, November 1, 2017

Full text files

WP347.pdf PDF-file 

Download statistics

Questions (including download problems) about the papers in this series should be directed to Lena Löfgren ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2018-01-23 23:37:37.