Estimating the Causal Impact of the New Zealand Central Bank's Loan-to-Value Ratio Policy on Reducing House Price Inflation

In October 2013, the Reserve Bank of New Zealand imposed loan-to-value (LTV) restrictions on housing loans to slow the unsustainable rise in house prices. In this study Bayesian Structural Time Series (BSTS) introduced by Scott and Varian (2014) is used to investigate the causal impact of LTV on house price inflation. State-space components such as local linear trend, seasonality, and regression are explicitly used to predict the counterfactual values of the house price indices. Findings from this study show that the implementation of LTV did not affect national house price indices and, thus, did not reduce house price inflation. This contradicts the findings of two previous studies, which found a nearly 3 percentage point decrease in national housing cost inflation following the implementation of LTV. This study's data and code are being made available for replication and future research in this area