TILEC Work in Progress: Nicola Pavanini (Department of Finance)
Title: Leverage Regulation and Housing Inequality
By Jens Kvaerner, Nicola Pavanini and Yushi Peng.
Abstract
We estimate an equilibrium model of housing demand and supply. The model allows us to quantify the distributional effects of leverage regulation on mobility and access to high-quality housing. We match the population of households in Norway in 2010-2018, with demographic and financial characteristics, to the universe of housing transactions. Our model features households’ dynamic renting and owning choices, speculators’ housing portfolio rebalancing, and equilibrium pricing across housing products via a market clearing condition. We recover households’ willingness to pay for housing quality and moving costs across the income distribution. Our counterfactuals show that reducing loan-to-income (LTI) limits from 5 to 3 lowers homeownership rates for low-income households by 8.5%, of which two-thirds reflect preference heterogeneity, and reduces housing choice sets of middle-income households by up to 25%.