Housing Regulation and Bubbles

This paper develops a dynamic general equilibrium model in infinite horizon, in which deterministic rational housing bubbles may emerge. Borrowers are constrained by two macroprudential regulations: DTI and LTV limits. The paper investigates the conditions under which housing bubbles may emerge and their impact on the economy. We show that 1) with LTV regulations, the equilibrium may feature a housing bubble; 2) when agents face an LTV regulation, two equilibria may emerge: a bubbleless and a housing bubble equilibria; 3) tighter DTI and LTV regulation increase the housing bubble growth. In an extension of the model, we introduce an endogenous banking sector and a stochastic banking bubble. We show that housing and banking bubbles may arise simultaneously and when they do, we determine that banking bubbles amplify housing bubbles and vice versa