The Bank of England has published a staff working paper finding that tighter mortgage credit can reduce house prices initially while increasing rents and lowering homeownership. Using Ireland as a case study, the research examines mortgage borrowing limits introduced in 2015 and increases in real interest rates. Younger households and those on lower and middle incomes face both greater difficulty obtaining mortgages and higher rental costs. Tighter borrowing limits keep prospective buyers renting for longer or push them toward smaller homes. The additional rental demand requires higher rents to induce more landlords to supply properties. In the simulation of Ireland’s 2015 loan-to-value and loan-to-income limits, house prices fall 0.9% initially before returning toward their previous level over time. Rents peak 4.5% above their previous level seven years after the reform and remain 2.6% higher in the long run. Homeownership falls by 3 percentage points in the long run, while landlords hold a larger share of the housing stock. Higher real interest rates also increase rents and reduce house prices and homeownership. In the interest rate simulations, rents and house prices return to their previous levels once a temporary shock unwinds, whereas a permanent shock leaves rents higher and house prices lower over the long run. The research does not model the cyclical buildup of financial sector risks, so it does not provide a complete assessment of the costs and benefits of mortgage borrowing limits or determine their optimal calibration.
Bank of England research finds tighter mortgage credit raises rents despite initial house price declines
Bank of England research using Ireland as a case study finds that tighter mortgage limits and higher real interest rates can lower house prices initially while raising rents and reducing homeownership. Simulating Ireland’s 2015 borrowing limits produces rents that peak 4.5% higher and remain 2.6% higher in the long run, alongside a 3 percentage point decline in homeownership. The findings are not a complete assessment of the limits’ costs and benefits because the model excludes the cyclical buildup of financial sector risks.