The Effect of LTV-Based Risk Weights on House Prices: Evidence from an Israeli Macroprudential Policy

42 Pages Posted: 20 Dec 2018 Last revised: 7 Apr 2021

See all articles by Steven Laufer

Steven Laufer

Board of Governors of the Federal Reserve System

Nitzan Tzur-Ilan

Federal Reserve Bank of Dallas

Date Written: June 18, 2019

Abstract

This paper studies the link between bank mortgage lending and house prices by asking whether macroprudential policies that impose higher risk weights on high LTV mortgages can slow house price growth. For housing units likely to be purchased using mortgages subject to the higher risk weights, we estimate that prices are lower by about 2 to 3 percent than they would have been without the policy. We find that the policy has larger effects in more expensive areas of the country and, in particular, in lower quality neighborhoods within these more expensive areas. Combining our results with previous estimates of the effect of this policy on mortgage interest rates, we derive an estimate for the semi-elasticity of house prices with respect to mortgage rates that is consistent with the upper range of estimates reported in the literature.

Keywords: House Prices, Macroprudential Policy, LTV-Based Risk Weights, Mortgages

JEL Classification: G28, R31

Suggested Citation

Laufer, Steven and Tzur-Ilan, Nitzan, The Effect of LTV-Based Risk Weights on House Prices: Evidence from an Israeli Macroprudential Policy (June 18, 2019). Journal of Urban Economics, 2021, Available at SSRN: https://ssrn.com/abstract=3297797 or http://dx.doi.org/10.2139/ssrn.3297797

Steven Laufer

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
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Nitzan Tzur-Ilan (Contact Author)

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

HOME PAGE: http://nitzantzur-ilan.com

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