Roughly 10 years ago the financial crisis started, with credit-financed housing booms and increasing leverage of households and banks at its heart. In my PhD thesis, I analysed the instruments which have been created or reformed in reaction to the crisis in order to restrict lending and borrowing. A core question is whether these instruments can be effective in restricting household debt levels, given their legal design. Debt-service-to-income (DSTI), loan-to-income (LTI) and loan-to-value (LTV) limits in the Netherlands and Ireland are among the instruments which I analysed. This article shows that there are considerable differences in the design of these limits in these countries, which matter for their effectiveness. In both countries, there are still gaps that can undermine the
effectiveness of the rules. This may weaken the protection against booms and busts. The differences in design also affect how much own responsibility lenders retain.

High debt levels
In the years before the crisis, household debt levels in almost all EU countries strongly increased, especially in the Netherlands and Ireland (figure 1).
This was possible because – among other things – many banks lowered their lending standards under competitive pressure, and because they could pass on risks through securitisation. In various countries, households were willing to borrow more due to over-optimism about rising housing prices and underestimation of risks. Mian and Sufi (2015) explain how debt amplifies a boom by increasing the buying power of those who are over-optimistic about the value of houses. Meanwhile, high debt levels make households vulnerable for declining income or rising interest rates. Frequently, a bursting housing bubble results in surging non-performing loans (NPLs), reduced economic growth, and financial instability. After house prices started falling in the Netherlands (ultimately -20%) and Ireland (ultimately
-50%), both countries indeed experienced several years with negative economic growth. Meanwhile, NPLs on mortgages in the Netherlands remained low, but in Ireland they exceeded 15% since 2012 (till at least 2017).


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Author: Arien van ‘t Hof