DP13503 Take It to the Limit? The Effects of Household Leverage Caps

Author(s):	Marc Gabarro, Rustom M Irani, José Luis Peydró, Sjoerd van Bekkum
Publication Date:	February 2019
Date Revised:	June 2020
Keyword(s):	household leverage, Loan-to-value Ratio, macroprudential policy, Residential Mortgages, Solvency vs. Liquidity Tradeoff
JEL(s):	E21, E58, G21, G28, G51
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=13503

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.