Tighter mortgage credit lowers house prices but raises rents
Restricting mortgage credit raises rents as prospective buyers remain tenants, Bank of England research finds. Its model of Ireland's 2015 mortgage limits puts the rent increase at 4.5 percent seven years after the reform.
Lower prices, fewer homeowners
Juan Castellanos, Andrew Hannon and Gonzalo Paz-Pardo model Ireland's 2015 mortgage reform using households differing in age, income and wealth.
Their experiment imposes loan-to-value limits of 80 percent for owner-occupied purchases and 70 percent for buy-to-let purchases, plus a 3.5 loan-to-income limit for first-time buyers.
House prices fall 0.9 percent initially, then recover close to their previous level.
Rents peak 4.5 percent above their initial level after seven years and remain 2.6 percent higher in the long run.
Long-run homeownership falls from 77.97 percent to 74.79 percent.
Higher rents hurt younger, poorer and middle-income tenants, while landlords benefit and housing wealth becomes more concentrated.
Higher rates squeeze tenants too
Rental supply expands only when higher rents compensate additional landlords for buying illiquid properties.
A permanent 20 basis point real interest rate increase raises long-run rents 1.4 percent, lowers house prices 0.6 percent and reduces homeownership 0.5 percentage points.
A temporary 100 basis point increase, unwinding over four years, raises rents 10 percent and lowers house prices 0.5 percent initially.
Both subsequently return to their starting levels.
Unlike mortgage limits, rate increases also affect existing borrowers and savers.
Costs are not the verdict
The model puts the reform's welfare loss for newborn households at 1.5 percent of lifetime consumption.
It does not model the financial stability benefits of preventing cyclical risk accumulation.
The authors therefore offer neither a full cost-benefit assessment nor optimal mortgage limits.