IMF Study on LTV and LTI Effects

[Lightning]

I was looking for international examples of the effects of the implementation of LTV and LTI/DTI (debt-to-income) ratios for mortgage lending.

The IMF conducted this detailed study into the effects of implementation in South Korea.

The conclusions were:

• Transaction activity drops significantly in the three-month period following the tightening of LTV/DTI regulations.
• Price appreciation slows down a bit later, in a six-month window rather than the three-month window.
• Price dynamics appear to be reined in more after LTV tightening rather than DTI tightening.
• Expected house price increases in the future become lower after policy intervention.
• Plans to purchase of a home are more likely to be postponed by those who already own a property, i.e., potential speculators, but not by those who do not own a property, i.e., potential first-time home buyers.
• Tighter limits on loan eligibility criteria, especially on LTV, curb expectations and speculative incentives.

and

Policy implications of our analysis are encouraging. In housing markets, expectations are key as they often facilitate the settling in of bubble dynamics. If, as suggested by the evidence presented here, limits on LTV curb expectations and discourage potential speculators, they can be effective tools to tame real estate booms and contain the associated risks.

 

[Brendan Burgess]

Very useful and I will read in detail later.

I think it should alert us to some of the issues which might arise, but we also must be careful as the economies and cultures and lending practices are probably very different.

Brendan

 

[Brendan Burgess]

This is from the Consultation Paper

Box 2: International experience of LTV and LTI ratios
Limits on LTV and LTI ratios have been common in Asia over the past decade and are coming to increasing prominence in Europe. According to an IMF survey of macroprudential instruments to address real estate booms, the most widely-used tool is thelimit on LTV ratios, followed by sectoral capital requirements and LTI caps or a combination of LTV and LTI limits. There has been an increase in the use of LTVs and LTIs since the global crisis, especially in advanced economies. Norway and Sweden introduced guideline limits on LTV ratios of 85 per cent for new residential mortgage lending in recent years. Finland introduced a limit, effective in 2016, for real estate loans of 90 per cent (95 per cent for new home buyers), measured against the fair value of all collateral. In Denmark, covered-bond legislation limits bond-backed mortgages to 80 percent of home values and in Italy mortgages over 80 per cent LTV are discouraged. Canada has had a LTV cap in place since 2008. New Zealand introduced a LTV cap of 80 per cent on a proportion (90 per cent) of new lending in 2013. Hong Kong implemented LTV caps in the early 1990s and has varied the level of these caps counter-cyclically, as has Korea, where caps on LTV and DTI have been in place since the early 2000s. Singapore has had a LTV cap in place since 1996 and reduced the level of the cap from 90 to 80 per cent for all borrowers in 2010. Tighter limits for non-owner occupiers are in existence in Hong Kong (50 per cent LTV for all non-owner-occupied residential properties) and Singapore (60 per cent LTV cap in place for borrowers who have one or more outstanding housing loans and 50 per cent for non-individuals). The UK introduced a LTI cap of 4.5 times, also on a proportion (85 per cent) of new lending, in 2014.

There is a large literature addressing the effectiveness of macro-prudential measures for the housing sector. The cited IMF survey highlights that a number of studies have empirically found that a tightening of LTV and DTI ratios can slow the growth rate of mortgage loans, and reduces the potential for a housing bubble to emerge. It also examines the growing body of evidence that shows the benefit of LTV and DTI ratios in reducing the severity of downturns, fire-sale dynamics and loan losses when the housing market turns. Hong Kong has had a LTV cap in place since 1994 and suffered very low mortgage losses after the Asian crisis even though housing prices fell more than 60 per cent. A Bank of England study reviews international experience with these policy measures and notes that they have typically reduced risk in the financial system and make it more resilient. It concludes that although these instruments have not typically been aimed at housing price growth, there is some evidence of a modest and lagged effect on housing price growth.