Abstract Models in the infinite horizon macro‐housing literature often assume that borrowers
are constrained exclusively by the loan‐to‐value (LTV) ratio. Motivated by the Swedish
microdata, I explore an alternative arrangement where borrowers are constrained by a
collateral constraint and by a debt‐service‐to‐income ratio. While stricter LTV limits are often
considered as a measure to tackle the rise in household indebtedness, I find that policy
designed to lower the maximum permissible LTV ratio may actually leave the debt‐to‐GDP …

Abstract Models in the infinite horizon macro-housing literature often assume that borrowers
are constrained exclusively by the loan-to-value (LTV) ratio. Motivated by the Swedish micro-
data, I explore an alternative arrangement where borrowers are constrained by the feasibility
of repayment, but choose a house of maximum permissible size conditional on the LTV
restriction. While stricter LTV limits are often considered as a measure to tackle the rise in
household indebtedness, I find that policy designed to lower the maximum permissible LTV …