- Macroprudential limits would have had substantial impacts on house prices between 2003 – 2010.
- The level and the timing of the introduction of macroprudential limits is a crucial determinant of their impact on housing values.
DUBLIN, 23-12-2015 — /EuropaWire/ — A new research technical paper, ‘Credit conditions, macroprudential policy and house prices’, analyses the micro-empirical link between the large volume of literature on credit and house prices and the burgeoning literature on macro-prudential policy (MPP).
The global financial crisis of 2007/2009 highlighted limitations in the ability of supervisors to manage financial sector risks on a systemic wide basis. In particular, the crisis highlighted the integral role of the housing market in driving financial cycles. To address these challenges, regulatory authorities have recently put a greater focus on the use of MPP instruments which are aimed at breaking the link between credit growth, house prices and banking sector instability as well as building bank and borrower resilience to financial shocks.
The micro-level house price model estimates that a ten per cent increase in income increases house prices by between 2.1 and 2.6 per cent, while a ten per cent increase in wealth increases house prices by 2.4 – 2.5 per cent.
MPP drives house price changes in two ways: firstly through the direct impact of instantaneously lower credit volumes; secondly through the collateral channel, by scaling down the down-payment available to borrowers via weakened housing equity.
The findings imply an important role for MPP in cooling a rapidly-growing housing market. Further they suggest that the levels at which LTV, LTI and DSR limits are set are crucially important in determining the impact on prices.
Despite the increasingly commonplace existence of MPP in global regulatory toolkits, there is a dearth of evidence which tests the effectiveness of these limits. Using loan-level data on Irish mortgages originated between 2003 and 2010, this research examines credit availability at the borrower level as a function of income, wealth, age, interest rates and prevailing market conditions around Loan to Value ratios (LTV), Loan to Income ratios (LTI) and monthly Debt Service Ratios (DSR).
Notes to Editors
Research Technical Papers are published on the Central Bank’s website here.
SOURCE: Central Bank of Ireland