Economic Le*er Se-. Assessing the impact of macroprudential measures Mary Cussen, Martin O’Brien, Luca Onorante & Gerard O’Reilly 1 Vol 2015, No. 3 Abstract This Letter attempts to assess the potential impact of implementing the recently proposed proportionate loan-to- value ratio on the wider housing market. Using a dual micro and macro simulation strategy, we find evidence for some moderate negative impacts of the LTV cap on house prices and mortgage interest rates, with a proportionately larger impact on housing supply. These can, however, be considered to be close to the maximum possible impacts given the conservative assumptions and empirical strategies underlying our analysis. 1 Introduction Macro-prudential policies to promote financial sta- bility and safeguard the economy from the nega- tive consequences of unsustainable credit growth have been implemented in a number of countries in recent years. In many instances, these policies include restrictions on mortgage lending above cer- tain loan-to-value (LTV) and loan-to-income (LTI) ratios, mitigating the exposure of both banks and borrowers to potentially large losses in the event of a negative shock to the housing market. The Central Bank of Ireland has proposed to imple- ment proportionate LTV and LTI restrictions on new mortgage lending (CBI, 2014), with recent analysis highlighting the potential impact of such a policy on credit quality in the Irish context (Hal- lisey et al, 2014). In framing such a policy, however, it is also necessary to consider the wider impact on the housing market. This Letter examines the poten- tial impact of implementing the proposed macro- prudential measures 2 in terms of new mortgage lending, house prices and housing supply. Adopt- ing a methodology similar to that used in macro- prudential policy evaluations in other countries, we simulate the response of these variables to the pro- posed proportionate LTV cap on principal dwelling mortgages under a number of scenarios, and com- pare these to the outcomes that could be expected in a “no policy change” context. The Letter proceeds as follows: Section 2 re- views the methodological approaches in the inter- national literature to assessing the impact of LTV caps as well as some of the empirical findings of those analyses; Section 3 discusses our approach 1 Email: mary.cussen@centralbank.ie, martin.obrien@centralbank.ie, luca.onorante@centralbank.ie, ger- ard.oreilly@centralbank.ie. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Central Bank of Ireland or the ESCB. We thank Terry O’Malley, Christian Danne and Graeme Walsh for assistance with the data and helpful conversations about this piece. Comments from Rea Lydon, Tara McIndoe Calder and Gabriel Fagan are also gratefully acknowledged. 2 The proposed measures include a ceiling of 80 per cent on the LTV for 85 per cent of the value all new mortgage lending for primary dwellings, and an LTI limit of 3.5 times gross annual income covering 80 per cent of the value of new mortgages. Our analysis focusses on the proposed LTV cap as this is found to be the most binding.