We build a model of the aggregate housing and rental markets in which house prices and rents are determined endogenously. Households can choose their housing tenure status (renters, homeowners, or landlords) and the size of their homes depending on their age, income and wealth. We use our model to study the impact of changes in credit conditions on house prices, rents and household welfare. We analyse the introduction of policies that limited loan-to-value (LTV) and loan-to-income (LTI) ratios of newly originated mortgages in Ireland in 2015 and find that, consistent with empirical evidence, they mitigate house price growth but increase rents. Homeownership rates drop, and young and middle-income households are negatively affected by the reform. An unexpected permanent rise in real interest rates has similar effects – by making mortgages more expensive and alternative investments more attractive for landlords, it increases rents relative to house prices.
Authors
European Central Bank, Castellanos, Juan, Hannon, Andrew, Paz-Pardo, Gonzalo
- Catalogue number
- QB-AR-24-094-EN-N
- Citation
- European Central Bank, Castellanos, J., Hannon, A. and Paz-Pardo, G., The aggregate and distributional implications of credit shocks on housing and rental markets , European Central Bank, 2024, https://data.europa.eu/doi/10.2866/841884
- DOI
- https://data.europa.eu/doi/10.2866/841884
- ISBN
- 978-92-899-6825-6
- ISSN
- 1725-2806
- Pages
- 55
- Published in
- Belgium
- Themes
- Economy — Finance
Table of Contents
- The aggregate and distributional implications of credit shocks on housing and rental markets 1
- Abstract 2
- Non-technical summary 3
- 1 Introduction 5
- 2 The model economy 10
- 2.1 Production 11
- 2.2 Households 12
- 2.3 Equilibrium 15
- 2.4 Model intuition: a supply and demand explanation 16
- 3 The Irish macro-prudential reform 18
- 3.1 Empirical evidence 19
- 3.2 Model calibration 21
- 3.3 Aggregate and distributional effects of tighter borrowing limits 27
- 4 Interest rates, credit standards, and price dynamics 32
- 4.1 A permanent rise in the real interest rate 33
- 4.2 Interaction with credit standards 35
- 4.3 Transition dynamics and welfare 35
- 5 Conclusion 37
- References 40
- Appendix 44
- A Additional empirical evidence 44
- B Further model details 47
- C Additional model results and experiments 52
- Acknowledgements & Imprint 55
