Aggregate and Distributional Impacts of LTV Policy in China

We study how China’s loan-to-value (LTV) policy affects mortgage markets and household consumption, focusing on an abrupt and unprecedented relaxation in LTV limits for secondary houses from 2014Q4 to 2016Q3. Using a rich dataset of over three million loan-level records from a major Chinese commercial bank, supplemented by survey data on urban household finances, we analyze how this policy shift influenced mortgage demand, house prices, and consumption across household groups and at the aggregate level. We find that this LTV relaxation, aimed at promoting housing investments, spurred a mortgage boom, especially in primary home mortgages, while crowding out household consumption among middle-aged, high-education households. Motivated by these findings, we develop and calibrate a dynamic equilibrium model that distinguishes between primary homes for housing services and secondary houses for investment. When the LTV limit for secondary houses is relaxed, demand for these properties surges, increasing house prices and capital gains. Unlike prior literature, we identify a housing investment channel in which these capital gains enable existing homeowners---particularly middle-aged and high-income households---to upsize their primary residences. Rising house prices then drive further demand and mortgage borrowing, amplifying the effects of the LTV policy change and reducing these households' non-housing consumption.