With (More Than) a Little Help from My Bank. Loan-to-Value Ratios and Access to Mortgages in Italy

This paper introduces a framework to jointly account for the affordability of the periodic repayment of the housing debt (income constraint) and of the initial deposit (budget constraint). An application to 2006-2012 micro-data on Italian households indicates that the improvement in the ability of the latter to sustain a mortgage was counterbalanced by a tighter budget constraint. The framework can be employed as a tool to assess the impact of macro-prudential policies – like caps on LTVs – on the pool of households who can actual access housing mortgages without running into financial distress: the level and the slope of the ‘mortgage affordability curve', the curve that shows the share of eligible households at different LTVs provided by the banks, change over time and are affected by the definition of households' wealth. The 2008-09 crisis lowered the share of eligible families at high LTVs and mildly increased it at lower LTVs. Moreover, we find that mortgage capability worsened more for the middle class and that the decline in Italian LTVs across the period was mainly supply driven, whereas households' preferences barely changed. Finally, alternative policies affecting mortgage affordability display heterogeneous effects both in enlarging households' market participation and in fostering safer lending policies