The real effects of loan-to-value limits: empirical evidence from Korea

Abstract

This study adds to a recent and growing literature that assesses the effects of macroprudential policy. We compare the effects of monetary policy and loan-to-value ratio shocks for Korea, an inflation targeting economy and an active user of loan-to-value limits. We identify shocks using sign-restricted structural VARs and rely on a recent approach within this method to conduct structural inference. This study finds that both monetary policy and loan-to-value ratio shocks have effects on different measures of credit, i.e., real bank credit, real total credit and real household credit. We also find that both shocks have non-negligible effects on real house prices, including effects on real output, real consumption and real investment. We do, however, find that loan-to-value ratio shocks have negligible effects on the price level. These findings indicate that for the period covered by this study, limits on loan-to-value achieved their financial stability objectives in Korea in terms of limiting credit and house price appreciation under an inflation targeting regime. Furthermore, it attained these objectives without posing any threat to its price stability objective. Overall, these findings suggest that limits on loan-tovalue have important aggregate consequences despite it being a sectoral, targeted policy instrument.

The Preferences for Housing Loan Demand in Indonesia Before and After the Loan-to-Value Policy Change

“…The findings of Pontines (2021) show that during the study the limit on the value of loans to achieve financial stability goals in Korea in terms of limiting credit and appreciating house prices lies under an inflation targeting regime. Cunha, Lambrecht & Pawlina (2013) suggest that an outstanding LTV ratio is driven by household characteristics, life cycle effects, and characteristics of the type of mortgage.…”