Abstract
This paper examines the effects of a Loan-to-Value (LTV) limit on household's choices in the credit and housing markets. Using a large and novel micro database from Israel, including rich information on the loans, the borrowers and the acquired assets, and using matching techniques, I find that the LTV limit had an effect on the mortgage contract terms, but did not lead to credit rationing (no segment of the population is excluded from the market). The LTV limit induced borrowers to buy cheaper and lower quality assets and to move farther from high demand areas to lower quality neighborhoods. I conclude that the LTV limit, the most common macroprudentail policy tool, has an impact not only from a financial stability perspective, by reducing the leverage of households, but also has unintended consequences on borrower's choices in the housing market.
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