Loan-to-value ratio restrictions and house prices: Micro evidence from New Zealand

Abstract

This paper contributes to the international policy debate on the effect of macroprudential policy on housing-market dynamics. We use detailed New Zealand housing market data to evaluate the effect of loan-to-value ratio (LTV) restrictions on house prices. Our identification relies on the exemption for new builds from the LTV restrictions implemented during 2013–16 by the Reserve Bank of New Zealand. The empirical findings suggest that the LTV policy is effective at reducing house price inflation by limiting the credit-fuelled housing demand channel. The magnitude and duration of the policy effect depend crucially on the rate of house price growth at the time when the policy is implemented. When house prices are increasing quickly, the effect of LTV on house prices tends to be muted and short-lived.