What is the impact of macroprudential regulations on the Swedish housing market?

Abstract

Housing shortages and urbanization have led to higher house prices and higher levels of household debt. Sweden's Financial Supervisory Authority has introduced several borrower-based, macroprudential tools to control debt growth over the last ten years. In 2010, a mortgage loan-to-value (LTV) ratio was introduced, and in 2016, the amortization of 1 percent of the loan balance was mandated by law if a mortgage's value was higher than 50 percent of the property value. Furthermore, in 2018, the amortization requirement was tightened, as all households with a mortgage valued at larger than 4.5 times their annual income were forced to be amortized by 1 percent of the loan balance. The question is whether the Financial Supervisory Authority's macroprudential tools have exerted the intended effect. We combine a hedonic regression modeling approach with a regression discontinuity design (RDD) to estimate the causal impact on house prices. The effect of these macroprudential tools is estimated on the single-family housing market and the condominium market. We are using microdata of one million housing transactions between 2008 and 2019. Our estimates indicate that the amortization requirement in 2016 resulted in a negative impact of around 7 percent on housing prices but that a slightly lower impact resulted from the 2018 amortization requirement. The 2010 LTV ratio requirement did not impact the prices of dwellings.