The leverage-liquidity tradeoff of mortgage regulation


We evaluate the impact of mortgage regulation on household balance sheets, highlighting important trade-offs in terms of financial vulnerability. Using Norwegian tax data, we show that loan-to-value caps reduce house purchase probabilities, debt and interest expenses -- thereby improving household solvency. We show that the documented reduction in leverage is robust to also accounting for parental debt uptake, suggesting that concerns about regulatory arbitrage are unwarranted. However, the higher downpayment requirement leads to a persistent deterioration of household liquidity. Back of the envelope calculations suggest that the positive leverage effect is dominated by the negative liquidity effect, making household consumption less stable in response to shocks. We confirm that households with reform-induced reductions in liquidity have larger consumption falls upon unemployment. Our results indicate that while LTV-caps are effective in reducing household debt and aggregate credit growth, they are not effective in increasing household resilience.


If you have any questions regarding the seminar, please contact the seminar organizers Gernot Doppelhofer or Tone Solheim.