Housing regulation and bubbles

Abstract

This paper develops a dynamic general equilibrium model in infinite horizon, in which deterministic rational housing bubbles may emerge. Borrowers are constrained by two macroprudential regulations: DTI and LTV limits. The study investigates whether housing bubbles can arise under these regulatory constraints and identifies the specific conditions for their emergence. Our findings show that: (1) with LTV regulations, the equilibrium may feature a housing bubble; (2) when agents face an LTV regulation, two equilibria may emerge: a bubbleless and a housing bubble equilibria; (3) tighter LTV regulations exacerbate the growth of housing bubbles.