Take it to the limit? : the effects of household leverage caps

Abstract

We analyze the effects of borrower-based macroprudential policy at the household-level. For identification, we exploit administrative Dutch tax-return and property data linked to the universe of housing transactions, and an introduction of loan-to-value regulation. The regulation reduces overall household leverage, with bunching in its limit. Ex-ante more-affected households substantially reduce leverage and debt servicing costs. Rather than buying cheaper homes or taking lightly-regulated loans, households 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. These effects are stronger among liquidity-constrained households.