Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/189947
Authors: 
Grodecka, Anna
Year of Publication: 
2017
Series/Report no.: 
Sveriges Riksbank Working Paper Series No. 347
Publisher: 
Sveriges Riksbank, Stockholm
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.
Subjects: 
borrowing constraints
household indebtedness
macroprudential policy
housing prices
loan-to-value ratio
debt-service-to-income ratio
JEL: 
E32
E44
E58
R21
Document Type: 
Working Paper

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