The European Central Bank published research on the housing affordability implications of shocks that restrict access to mortgage credit, highlighting a potential downside of borrower-based macroprudential tools introduced after the global financial crisis. Using a life-cycle model calibrated to Ireland’s 2015 mortgage borrowing limits, the analysis finds that tighter mortgage constraints can shift households from ownership to renting, pushing rents higher and lowering welfare for renters and prospective buyers even when house prices change little. In simulations of limits similar to a minimum 20% downpayment and a 3.5 loan-to-income cap, rents are 4% higher four years after the intervention and converge to a new steady state around 3% above the pre-reform level, while house prices are virtually unchanged (-0.01%). The homeownership rate drops by around 2 percentage points and housing ownership becomes more concentrated among richer households, with welfare losses concentrated among younger and lower- to middle-income households and gains accruing to rental property owners. Empirical results for Ireland align with the model, with areas where limits were most binding experiencing larger rent increases alongside larger house price reductions. The paper also models an unexpected rise in the real interest rate, finding broadly similar effects on rents, house prices and homeownership, and notes that higher rents can dampen the cooling effect of monetary policy on Harmonised Index of Consumer Prices inflation; credit limits in place reduce the sensitivity of rents and house prices to interest-rate shocks.
European Central Bank 2025-01-16
European Central Bank research finds borrower-based mortgage limits can raise rents and cut homeownership
The European Central Bank's research shows that mortgage credit restrictions can shift households from ownership to renting, increasing rents and reducing welfare. Simulations indicate tighter constraints, like a 20% downpayment and a 3.5 loan-to-income cap, lead to a 4% rent increase and a 2 percentage point drop in homeownership. Higher rents can also mitigate monetary policy's cooling effect on inflation, with credit limits reducing rent and house price sensitivity to interest-rate shocks.