Macroprudential Policy and Housing Market Expectations

By Pei KUANG, Kaushik MITRA, Li TANG and Shihan XIE
Published in European Economic Review

Abstract:

This paper studies how macroprudential policy changes affect consumers’ housing market expectations and housing affordability perceptions in the United Kingdom. We conduct a large-scale online survey experiment presenting hypothetical changes of three borrower-based macroprudential tools: residential loan-to-value (LTV), buy-to-let LTV, and loan-to-income ratios. We find that policy tightening lowers house price expectations, reduces homebuying intentions, and worsens affordability assessments, while loosening has the opposite effects. The residential LTV ratio is the most effective tool. To interpret these findings, we embed our survey estimates into a dynamic model linking expectations, credit, and housing demand. The model shows that immediate belief shifts significantly amplify house price and consumption responses, highlighting the importance of expectations in the transmission of macroprudential policy.