Discussion Paper Details

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Title: Take It to the Limit? The Effects of Household Leverage Caps

Author(s): Marc Gabarro, Rustom M Irani, José Luis Peydró and Sjoerd van Bekkum

Publication Date: February 2019

Keyword(s): household leverage, Loan-to-value Ratio, macroprudential policy, Residential Mortgages and Solvency vs. Liquidity Tradeoff

Programme Area(s): Financial Economics

Abstract: We analyze the effects of borrower-based macroprudential policy at the household-level. For identification, we exploit administrative Dutch tax-return and property ownership data linked to the universe of housing transactions, and the introduction of a mortgage loan-to-value limit. The regulation reduces mortgage leverage, with bunching in its limit. Ex-ante more-affected households substantially reduce overall leverage and debt servicing costs but consume 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. All of these effects are stronger for liquidity-constrained households.

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Bibliographic Reference

Gabarro, M, Irani, R, Peydró, J and van Bekkum, S. 2019. 'Take It to the Limit? The Effects of Household Leverage Caps'. London, Centre for Economic Policy Research.