The Expectation Channel of Mortgage Policy

Mortgage-borrowing restrictions, including caps on loan-to-value (LTV) and payment-to-income (PTI) ratios, are widely understood to affect housing markets by tightening or relaxing household credit constraints. This paper shows that these policies also shape housing market outcomes by altering homebuyers’ expectations. I study a major relaxation of LTV/PTI limits in South Korea in 2014, which signaled that the government would take a more supportive stance toward the housing market. After the reform, the strongest price increases occurred in areas where the borrowing limits were of limited importance but where house prices were sensitive to shifts in expectations. In these areas, homebuyers became more optimistic and engaged in speculative home purchases. Some of this activity was financed through interest-free, peer-to-peer lending that was not subject to formal credit regulations. Taken together, the findings show that mortgage policies influence housing markets not only through their direct, mechanical effects on credit constraints but also by shaping how homebuyers form expectations about future conditions.