The effect of borrower-specific loan-to-value policies on household debt, wealth inequality and consumption volatility : an agent-based analysis

This paper analyses the effects of borrower-specific credit constraints on macroeconomic outcomes in an agent-based housing market model, calibrated using U.K. household survey data. We apply different Loan-to-Value (LTV) caps for different types of agents: first-time-buyers, second and subsequent buyers, and buy-to-let investors. We then analyse the outcomes on household debt, wealth inequality and consumption volatility. The households' consumption function, in the model, incorporates a wealth term and income-dependent marginal propensities to consume. These characteristics cause the consumption-to-income ratios to move procyclically with the housing cycle. In line with the empirical literature, LTV caps in the model are overall effective while generating (distributional) side effects. Depending on the specification, we find that borrower-specific LTV caps affect household debt, wealth inequality and consumption volatility differently, mediated by changes in the housing market transaction patterns of the model. Restricting investors' access to credit leads to substantial reductions in debt, wealth inequality and consumption volatility. Limiting first-time and subsequent buyers produces only weak effects on household debt and consumption volatility, while limiting first-time buyers even increases wealth inequality. Hence, our findings emphasise the importance of applying borrower-specific macroprudential policies and, specifically, support a policy approach of primarily restraining buy-to-let investors' access to credit.