Macroprudential Policy and the Role of Institutional Investors in Housing Markets

Working Paper: CEPR ID: DP17479

Authors: Manuel A. Muñoz; Frank Smets

Abstract: Since the onset of the Global Financial Crisis, the presence of institutional investors in housing markets has steadily increased over time. Real estate funds (REIFs) and other housing investment firms leverage large-scale buy-to-rent real estate investments that enable themto set prices in rental markets. A significant fraction of this funding is being provided in the form of non-bank lending - which is not subject to regulatory LTV ratios - and REIFs are generally not constrained by leverage limits. We develop a quantitative DSGE model that incorporates the main features of the REIF industry and identify leakages of existing macroprudential policy: (i) already existing countercyclical LTV rules on residential mortgages trigger a credit reallocation towards the REIF sector that can amplify financial and business cycles; while (ii) "non-existent" countercyclical LTV rules on lending to REIFs are particularly effective in taming such cycles. Due to the different mechanisms through which they operate, both types of LTV rules complement each other and jointly yield larger welfare gains (for savers and borrowers) than in isolation.

Keywords: rental housing; real estate funds; loan-to-value ratios; leverage; leakages

JEL Codes: E44; G23; G28

Causal Claims

Cause	Effect
existing countercyclical LTV rules on residential mortgages (G21)	credit reallocation towards the REIF sector (R38)
credit reallocation towards the REIF sector (R38)	amplify financial and business cycles (E32)
lack of countercyclical LTV rules on lending to REIFs (G21)	significant credit growth in that sector (G21)
significant credit growth in that sector (G21)	stabilize financial cycles (E32)
tightening mortgage lending standards (G21)	increase demand for rental housing (R21)
increase demand for rental housing (R21)	higher property prices (R31)