Featured Graduate Student Research: Brian Higgins
Featured Graduate Student Research: Brian Higgins
Overview of the research project
The recent Financial Crisis has highlighted the role of mortgage credit in driving house prices and aggregate economic activity. In response policy makers have proposed macroprudential policies limiting the amount of leverage households can take on. However, there is little consensus on the effectiveness or optimal use of these polices.
Do minimum downpayment rules or maximum loan-to-income (LTI) rules keep house prices down more effectively? How should we calibrate these types of rules, and should they vary over the business cycle? Are there knock on consequences for rental prices? These are important questions at the intersection of macroeconomics and finance, the results of which will be critical for policy makers' implementing these policies in practice.
My research project sheds light on these questions by combining a quasi-experimental setting with unique housing and borrowing data. I use an unexpected policy change - the introduction of minimum downpayment and loan-to-income caps in Ireland - to identify how these types of rules affect house prices, household borrowing and home ownership. I combine two unique datasets: the universe of Irish mortgage data; and millions of sale and rental listings from Ireland's largest property website. These allow me to see what happened to individual's borrowings and to the cost of housing at a granular level after the policy change.
Research trip to Ireland
With the support of the Europe Center, I visited the Central Bank of Ireland during June 2019. I was hosted by Bank economists Fergal McCann and Terry O’Malley who facilitated access to the Bank’s confidential dataset of mortgages and loans. These data will form a major part of my dissertation and are only available on-site at the Central Bank. I used the trip to undertake exploratory data analysis of borrowing before and after the policy change. I also used the visit to extract non-confidential county-level data that can be used at Stanford. Finally, I had discussions with many economists at the Central Bank to better understand the institutional context for the policy change.
Initial results
This research has found two important results: following the introduction of borrowing constraints (i) the aggregate price-rent ratio fell in Ireland; and (ii) the price-to-rent ratio fell most in areas where the policy change was most binding.
Figure 2 Price-to-rent ratio in counties with high and low LTV (left) and LTI (right)
The first result comes directly from examining the aggregate price-to-rent ratio over time. In the months leading up to the policy change, the price-to-rent ratio was rising from its post-crash trough. After the policy change, the previous trend reversed, and the price-to-rent ratio declined. Indeed, the price-to-rent ratio fells lower than the post-crash trough.
The aggregate price-to-rent ratio may fall for many reasons. To check whether the policy change was a driver of the fall in the price-to-rent ratio I compare across counties within Ireland. I measure in which areas the policy was most binding on impact by measuring the average loan-to-income and loan-to-value in mortgages issued in the two years prior to the policy. Figure 2 shows that the price-to-rent ratio falls most in areas where the loan-to-income ratio was high in the pre-period. There are no differential trends in areas that had high or low loan-to-value ratios before the policy.
These initial results suggest that borrowing limits can efficiently lower house prices relative to rents. Furthermore, the results indicate that the loan-to-income constraint influenced the price-to-rent ratio most. In future trips to Ireland I plan to investigate the mechanisms underlying these changes using the mortgage micro-data as well as simulations from a quantitative model.
Impact of Europe Center Grant
The Europe Center Grant has helped my research immensely and I am very grateful for this. First and foremost, this research question could not have been tackled without access to the Central Bank’s confidential data, and the Europe Center’s travel grant was crucial to me travelling to Ireland this summer. In additional to accessing these data, I had many fruitful discussions with economists at the Central Bank that will hopefully turn into collaborations.
Brian Higgins is a PhD candidate in Economics.