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The purpose of this paper is to highlight the relation between the loan-to-value (LTV) ratio and the price-rent (PR) ratio. The paper intends to relate the PR-ratio to housing return and the potential for a leverage gain in housing investments by considering the funding structure of housing investments.

Combining a PR-ratio approach with the housing return in the case of mortgage-financed housing, as presented by Borgersen and Greibrokk (2012), this paper relates LTV to the PR-ratio.

When formalising the relationship between leverage and housing return, as given by Muellbauer and Murphy (1997), the paper finds the effect of a higher LTV on the user cost of housing as the net effect of a higher borrowing cost and the associated leverage gain. The latter depends on the relationship between house price growth and the mortgage rate and, because the leverage gain has an ambiguous effect on the user cost of housing, the relation between the LTV-ratio and the PR-ratio is context-specific.

The paper aims to contribute to the literature on PR ratios in two ways. First, by explicitly including the LTV-ratio in the user cost of mortgage financed housing and, correspondingly, in the PR-ratio derived from the user cost. Second, by including the funding structure of housing investments the expression for the capital gain, which often is discussed in the PR-ratio literature, is related to the funding structure and includes both a price gain and a leverage gain.

The purpose of this paper is twofold: first, it derives the optimal loan-to-value (LTV)-ratio for a mortgagor that maximizes the return to home equity when considering the capital structure of housing investment. Second, it analyses the demand-side contribution to mortgage market variability across monetary policy regimes.

The paper endogenizes both the relation between the LTV ratio and the mortgage rate and the relation between LTV and the rate of appreciation. When we consider LTV-variance and the demand-side contribution to mortgage market variability, three stylized regimes is considered.

The paper finds an intuitive ranking of the optimal LTV-ratios across regimes, and the optimal LTV-ratio peaks during a housing boom. When, however, monetary policy ignores asset inflation the demand-side contribution to market variability is highest during normal market conditions. Hence, there is a potentially hump-shaped relation between the risk exposure of individual mortgagors and the demand-side contribution to mortgage market variability.

The paper finds a potentially hump-shaped relation between the risk exposure of individual mortgagors and the demand-side contribution to mortgage market variability, which, to the best of our knowledge, is novel. The paper shows how macro-prudential and monetary policy are complementary tolls for preserving financial stability.

The purpose of this paper is to analyse the interaction between a profit maximising mortgagor and a newcomer to a mortgage market with Bertrand competition where the newcomer has a populistic entry strategy and undercuts mortgage market rates. The intention of the paper is to relate the populistic entry strategy to mortgage market characteristics and the strategic market position of both the established mortgagor and the newcomer in question.

The paper analyses a mortgage market by combining the behaviour of a profit maximising mortgagor with that of a newcomer to the mortgage market which has a populistic entry strategy and does not maximise profits. The short-run market solution provides comparative statics on the strategic market position of both the established mortgagor and the newcomer to the mortgage market during the entry phase both related to product differentiation and to price mirroring and undercutting of mortgage rates.

The model finds a mortgage market solution where a lower mortgage rate helps the newcomer gain a customer base. As the newcomer's strategy to mirror prices makes it unable to pass-through funding cost to its mortgage rate, the strategy is unsustainable over time. The established mortgagor has a strategically beneficial position as the mortgage market rates only relate to its funding cost. Unless the newcomer has a funding cost advantage, the established mortgagor has a higher interest rate margin. Differentiation impacts the newcomers’ interest rate margin positively. If the newcomer lacks a funding cost advantage, there is a critical mirroring rate that ensures it a higher interest rate margin. The higher the newcomers’ own funding cost, the higher is the upper bound for price mirroring, relating market entry to a small undercutting of mortgage rates and a mortgage market with weak competition. The funding cost of the established mortgagor pulls pricing in the opposite direction, allowing for a lower mirroring rate and tougher mortgage market competition during entry.

The paper aims to contribute to the understanding of market equilibrium in the absence of profit maximising behaviour. Framing a mortgage market in terms of a duopoly where a newcomer enters with a populistic entry strategy offering a lower mortgage rate and a mortgage product with a different loan-to-value (LTV) ratio, a novel mortgage market case comes about. The populistic entry strategy produces an augmented reaction curve, crucial for the mortgage market rates.

The purpose of this paper is to highlight the importance of home equity and the interplay between market segments for housing market developments. The intention is to show that it is not only the aggregate equity gain but also the distribution of equity gains between segments that matter for how shocks to income impact house prices.

The paper sets out a linear housing market model with three segments. Households trade up a housing ladder and link the three segments for owner-occupied housing. The up-trading is equity-induced. An expression for the house price index, which is related to the market segment prices both directly through the segment size and indirectly through a segment position on the housing ladder is derived. The author considers the price effects of shocks to income in four housing market regimes.

The heterogeneous housing market model shows how the interplay between segments impacts housing markets. When considering shocks to income, short-run deviations in the price-to-income (PTI) ratio compared to their long-run equilibrium due to equity-induced up-trading were found. The extent of PTI overshooting is related to the intensity of equity-induced up-trading between different segments. The market structure necessary to eliminate such overshooting is contingent on the distribution of equity gains between segments. Finally, the paper shows how the price effects of macroprudential interventions might be non-negligible when indirect effects are taken into account.

The linear housing market model with three market segments introduces a framework where the intensity of equity-induced up-trading in different market segments can be analyzed. This distributional aspect is, to the best of the author's knowledge, novel. The context-specific relation between housing market structure, equity-induced up-trading and short-run deviations in the PTI ratio provides a foundation for future research.

The purpose of this paper is to highlight the short run incentives for increasing LTV ratios that develop among mortgagees and mortgagors in the presence of excess return to housing. The paper provides a conventional framework for analyzing the capital structure of housing investments where higher LTV‐ratios comes about as stronger appreciation is met by increased mortgage rates and both mortgagees and mortgagors are short sighted.

The comment applies a capital structure approach to housing investments, highlighting the return to home equity. The paper distinguishes between price and leverage gains and presents a framework where the excess return to housing provides incentives for increasing LTV ratios. To illustrate, the Norwegian housing market is applied. The paper discusses short run market developments and the potential need for macro prudential regulations while introducing credit risk policy, nominal return targets and risk pricing.

The implementation of a simplistic capital structure approach to housing investments brings about a framework that allows us to present the incentives for, as well as the risk associated with, higher LTV ratios for both mortgagees and mortgagors. Short sightedness among mortgagees, driven by nominal return targets, allows mortgagors higher LTV‐ratios and increased risk taking.

While standard when analyzing commercial real estate, the capital structure approach – and the formal distinction between price and leverage gains for homeowners – is to the best of the authors' knowledge novel when analyzing housing finance. To understand the mechanisms impacting this playing field is important for both market analysts and regulators.

The purpose of this paper is to relate the marginal crisis risk of Woodford to a number of financial fragility indicators. The paper expands the interest rate gap approach by considering the capital structure of investments and systemic risk, dating back to Modigliani‐Miller. The model allows for distinct impacts from asset inflation, leverage as well as incentives for speculative investments for a central bank that aims to lean against the wind.

Framed in terms of the housing market and household behaviour, the paper sets out an augmented loss function which takes a number of financial fragility indicators into account. By moving beyond the case where all risk increasing mechanisms are driven by external monetary policy shocks, the approach shows why a central bank should be inclined to lean against the wind even in the absence of interest rate gaps.

Taking the return to equity into account, and moving beyond the case where all risk increasing mechanisms are related to external monetary policy shocks, the paper shows why a central bank might be inclined to lean against the wind even in the absence of interest rate gaps. The context‐specific nature of the monetary transmission mechanism in general, and the structure of the risk taking channel more specifically, calls for both internal financial market features as well as the link between financial markets and the real economy to impact on how and when to lean.

There seems to be increased awareness of the need to take financial stability considerations in monetary policy. In fact, Woodford argues that the balance between financial stability objectives and price and output stability is part of the choice when choosing between alternative short run paths for monetary policy. By taking a conventional approach to the capital structure of investments, this paper integrates asset inflation, leverage and incentives for speculation into a central bank's loss function in a way that to the best of the author's knowledge is novel.