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DPP Evidence-Based Policymaking Seminar (EBPM): Borrower Responses to a Macroprudential Loosening: the Importance of Liquidity Preferences

CEU Vienna
Wednesday, March 23, 2022, 5:30 pm – 7:00 pm

Macroprudential policies in the mortgage market have been broadly successful in their aims of reducing household leverage, promoting resilience to shocks, and taming credit-house price cycles. These policies have generally involved a \textit{policy tightening}, as they have been introduced in settings where no such policies previously existed. In this paper we produce the first evidence on an episode of \textit{loosening} under the macroprudential regime for mortgages. We exploit a reform of the Irish borrower-based measures in 2017 that increased LTV limits for a cohort of First Time Buyers. We show in response to the reform that borrowers bunched at the new maximum LTV of 90, increasing LTVs by 3 percentage points relative to the pre-period counterfactual. We highlight an adjustment mechanism that has important policy implications: we find no evidence that treated borrowers used higher LTVs to purchase more expensive properties; rather, we find that treated borrowers post lower downpayments after the reform, displaying a preference for liquidity which may tame the cyclical pressure on house prices that many would expect following a credit loosening.