Is Leverage a Determinant of Asset Price? Evidence from real estate transaction data

By exploiting the correlation between the legal type of a property purchased as collateral and the loan to value (LTV), particularly the positive correlation between the use of the property as revolving collateral and LTV as a strong and valid instrumental variable, we identify the positive effect of LTV on the property price with the observed negative reverse causality. We also find that the effect of LTV on the property price is far greater when unleveraged property transactions purchased with 100% equity financing are excluded than when they are included.