Research Spotlight - Brian Higgins, 4th Year Ph.D.
The 2008 global financial crisis highlighted the role of mortgage credit in driving house prices and aggregate economic activity. In response, policy makers have proposed macroprudential policies that limit the amount of leverage that households can take on. Given how new these policies are, there is plenty to learn about how they work in practice.
My research looks at the introduction of one such set of mortgage policies – a minimum down payment and maximum loan-to-income requirement – in Ireland in 2015. Comparing mortgages issued before and after the policy, I find big differences in how borrowers respond to these requirements: poorer groups of borrowers, who were close to the maximum loan-to-income limit, responded by buying cheaper houses, whereas richer groups of borrowers, who were close to the minimum down payment limit, responded by increasing their down payment and continuing to buy similarly priced houses. These patterns also show up in house prices, with prices falling in areas where many borrowers were close to the loan-to-income limit, and not in areas where borrowers were close to the minimum down payment requirement.
These results suggest that seemingly similar policies to limit mortgage borrowing can have different impacts depending on what types of borrowers are affected and what resources they have available to respond to new requirements.
As part of this project I’ve taken two trips to the Central Bank of Ireland --- supported by a grant from Stanford’s Europe Center --- which enabled me to access data on mortgages issued around the time of the policy change, as well as to interact with the policy makers in the bank who are implementing the policy.