The impact of prudential regulations on the UK housing market and economy: insights from an agent-based model

The impact of prudential regulations on the UK housing market and economy: insights from an agent-based model

Series: Working Papers. 2502.

Author: Marco Bardoscia, Adrian Carro, Marc Hinterschweiger, Mauro Napoletano, Lilit Popoyan, Andrea Roventini and Arzu Uluc.

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Abstract

We develop a macroeconomic agent-based model to study the joint impact of borrower and lender-based prudential policies on the housing and credit markets and the economy more widely. We perform three experiments: (i) an increase of total capital requirements; (ii) the introduction of a loan-to-income (LTI) cap on mortgages to owner-occupiers; and (iii) the introduction of both experiments at the same time. Our results suggest that tightening capital requirements leads to a sharp decrease in commercial and mortgage lending and housing transactions. When the LTI cap is in place, house prices fall sharply relative to income and the homeownership rate decreases. When both policy instruments are combined, we find that housing transactions and prices drop. Both policies have a positive impact on real GDP and unemployment, while having no material impact on inflation and the real interest rate.

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