The effect of the Swedish mortgage cap on house prices depending on the loan-to-value ratio: A regional study within Sweden

Abstract: This research aims to study the effect from the introduction of the Swedish mortgage cap in October 2010 on regional house prices in Sweden depending on the loan-to-value ratio. We study the house prices in regions around the introduction of the mortgage cap through a difference-in-difference analysis. Our theory is that the credit-restrictive mortgage cap has had a more negative price effect in regions with the higher loan-to-value ratios. This we base on basic demand mechanisms and the fact that previous theory suggests that credit-easing standards lead to higher house prices, which is why we believe the opposite is also true. Regionally we look at the greater Stockholm-, Gothenburg- , Malmö-area and the rest of Sweden. Our initial belief is that the big city regions have the highest loan-to-value ratios and thus have experienced a more negative price effect. We find evidence for our theory that a higher loan-to-value ratio has led to a more negative effect from the mortgage cap on the house prices. However, opposite to our expectations, the rest of Sweden has the higher loan-to-value ratio and is the region that has experienced a larger negative house price effect following the introduction of the mortgage cap.