Webex-seminar: The Effect of the LTV-Limit on Homeownership

Macroprudential policy is subject to debate: it reduces systemic financial risks, but might also induce market distortions. An example is the introduction of the LTV limit. There is a concern that this liquidity constraint hampers access to the housing market for first time home buyers. We study the effect of the introduction of the LTV limit in The Netherlands on the probability of first time buyers to become homeowner using a duration model. Our research design is underpinned by a theoretical model based on Brueckner (1986). This model shows that a reduction in the LTV limit results in postponing or omitting the transition to homeownership, but only for liquidity constrained individuals. We use this finding to construct a treatment and control group with parents’ financial wealth as a proxy for being liquidity constrained. We disentangle the effects of the LTV limit on the timing of the transition to first time homeownership from other market developments. We show that the effect of the LTV limit on this transition is small.