IEAS Working Paper No. 26-A003, July 2026

Abstract:
This paper examines the effect of loan-to-value ratio ceilings on mortgage lending
and housing purchase decisions. We exploit a sudden tightening of LTV restrictions
in Taiwan in December 2020, which imposed a maximum LTV ratio of 60 percent on
borrowers whose newly originated mortgage was their third or subsequent loan. Using
loan-borrower matched administrative data, we implement a difference-in-differences
design that compares third-mortgage borrowers with second-mortgage borrowers before
and after the policy change. We find that the policy significantly reduced LTV ratios
by 10.5% relative to the pre-reform baseline. Housing purchase prices fell by 5.8%,
implying an elasticity of purchase prices with respect to LTV ratios of approximately
0.55. Heterogeneity analysis shows that the effects of the LTV limits on housing purchase
prices were concentrated among borrowers with lower educational attainment, a
group more likely to face liquidity constraints.