Leverage, Borrower Behaviour and Macroprudential Policy: Exploring Impacts Across the Distribution

Using unique loan-level data for mortgages in Ireland, we test the impact on borrower leverage of the introduction of macroprudential limits to both loan-to-value (LTV) and loan-to-income (LTI). Observing lending activity pre... [ view full abstract ]

Using unique loan-level data for mortgages in Ireland, we test the impact on borrower leverage of the introduction of macroprudential limits to both loan-to-value (LTV) and loan-to-income (LTI). Observing lending activity pre and post the unanticipated introduction of the regulations, we estimate their direct effects on leverage, as well as exploring heterogeneous effects across groups of borrowers. Our method uses a simple econometric comparison of lending before and after the regulations as well as a propensity score matching difference-in-difference specification to provide more causal inference. We find that LTVs fell for both first time homebuyers (FTBs) and second and subsequent homebuyers (SSBs) with a high demand for leverage. The severity of the fall was greater for SSBs and for FTBs with either higher income or purchasing in a high property price area. We found a marginal tightening of LTIs for higher income SSBs and lower income FTBs. We also find that, in reaction to the lower leverage ratios, wealth constrained borrowers purchase less expensive housing while unconstrained borrowers purchase similar priced housing to before the rules, with an increased downpayment.