References

Suf (2009). The largest increase in mortgage debt was in credit riskier municipalities. Second, if we compare the change in the trend post-BNP, we can see that it was also larger in municipalities with low education. That is, during the period in which Spanish banks had plenty of funds to grant mortgages, municipalities with higher credit risk experienced a larger increase in mortgage debt. However, after the liquidity shock, it was precisely these same municipalities the ones who suffered the largest decline. It is worth mentioning again that the real economy was still growing in Spain after the BNP shock. Similar to Mian and Suf (2009), they also obtain the same result when considering municipalities with high housing supply elasticity (no housing bubble). Therefore, given this evidence, we can conclude that the credit boom in Spain was driven by supply. Once the supply froze, the credit boom collapsed. Basco and Lopez-Rodriguez (2018) also provide evidence consistent with the view that the increase in mortgage debt was also larger among households with lower assets. To summarize, even though there still exists a debate on the origin of the mortgage debt bubble, it seems clear that credit supply played an important role in the buildup and crash of the housing bubble.

6.2 mAcroprudentiAl regulAtion

After the burst of the recent housing bubble, a consensus emerged on the need to have macroprudential regulation. The formal defnition of macroprudential regulation (according to the IMF) is the use of prudential tools to limit systemic risk. In a nutshell, it means that it may be a good idea to control the fnancial sector before its vulnerabilities extend to the whole economy (systemic risk). Since it became clear that there was a feedback between house prices and debt, some of these macroprudential tools are focused on the mortgage market. One of the preferred macroprudential tools is to put a limit on the loan to value ratio (henceforth, LTV) of mortgage contracts. The idea is straightforward. If borrowers need to make a larger down payment to purchase a house, the size of the loan will be lower, which will limit housing demand and the overall debt of the economy. This policy has been encouraged by the IMF and several countries have introduced it (see, e.g., IMF 2013).

Basco and Lopez-Rodriguez (2018) investigate the effect of loanto-value on the Spanish mortgage debt growth. As we discussed above, mortgage debt increased more in municipalities with low education.

Loan-to-Value Value-to-Price

Fig. 6.3 Macroprudential regulation. Notes The left-hand side panel represents the evolution of the monthly mean of the loan-to-value ratios in high (blue dots) and low education (red dots) municipalities. The right-hand side panel represents the evolution of the monthly mean of value-to-price ratios for the same municipalities. Low (high) education municipalities are municipalities in the top (bottom) quartile of the of share of population with basic education distribution. The vertical line is August 2007 (the month of the BNP shock). See Basco and Lopez-Rodriguez (2018) for further information

Therefore, one possibility is that banks in these municipalities were offering softer terms to their borrowers. That is, given the same value of the house, the loan that these borrowers obtained were larger. If this were the case, we should observe that LTV was signifcantly larger in municipalities with lower education. Moreover, if LTV were driving the increase in debt, we should also observe that the ratio was increasing during the boom. The left-hand side of Fig. 6.3 reports the monthly evolution of the LTV ratio in low education (red) and high education (blue) municipalities. Note that none of the two predictions is borne out by the data. On the one hand, the LTV ratios are almost identical in the two groups of municipalities. That is, we cannot explain the difference in mortgage debt growth based on the differences in the LTV ratios. On the other hand, note that during the boom, the LTV ratio was stable around .73. Therefore, the (aggregate) boom in mortgage debt was not driven by a relaxation of the LTV ratio. Finally, note also that these average LTV ratios are way below the .80 threshold, which marks credit