Staff Working Paper No. 1,213
Juan Castellanos, Andrew Hannon and Gonzalo Paz-Pardo
We build a model of the housing and rental markets where house prices and rents are determined endogenously by the interaction of heterogeneous renters, homeowners and landlords. Using Ireland as a case study, we analyse the impact of changes in credit conditions from: (i) new policies introduced in 2015 that limit loan-to-value and loan-to-income ratios of newly originated mortgages and (ii) real interest rate shocks. We find that contractionary credit shocks reduce house prices on impact but increase rents over both the short and long run. Our results contribute to the broader assessment of macroprudential policy tools by uncovering their effects on rental-market margins, but do not provide a fully integrated assessment of the costs and benefits of these policies, as we do not model the cyclical build-up of financial-sector risks.
The aggregate and distributional implications of credit shocks on housing and rental markets
