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How Central Banks Use Loan-to-Value Caps to Cool Housing Markets
Description
Episode 41 of Monetary Policy Explained with Fexingo. Lucas and Luna dive into loan-to-value (LTV) caps—a targeted macroprudential tool central banks use to rein in housing bubbles without raising interest rates for the whole economy. They anchor on New Zealand's experience in 2021, when the Reserve Bank of New Zealand tightened LTV limits on investors to 40% equity required, then reversed them in 2023 as the housing market cooled. Lucas explains how LTV caps differ from blunt rate hikes: they constrain only new lending to high-leverage borrowers, leaving auto loans and business credit untouched. Luna notes that Ireland and Canada have used similar caps with mixed results. They discuss why central banks like LTV caps for their surgical precision—but also the risks of evasion through unregulated lending and second mortgages. No fluff, no jargon without explanation. Just a clear breakdown of one specific tool central banks deploy when house prices run hot.