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A Close Look at Loan-To-Value Ratios: Evidence from the Japanese Real Estate Market

Author

Listed:
  • Ono, Arito
  • Uchida, Hirofumi
  • Udell, Gregory
  • Uesugi, Iichiro
Abstract
Using a unique micro dataset compiled from official real estate registries in Japan, we examine the evolution of loan-to-value (LTV) ratios for business loans over the 1975 to 2009 period, the determinants of these ratios, and the ex post performance of the borrowers. We find that the LTV ratio exhibits counter-cyclicality, implying that the increase (decrease) in loan volumes is smaller than the increase (decrease) in land values during booms (busts). Most importantly, the median LTV ratios are at their lowest during the bubble period in the late 1980s and early 1990s. The counter-cyclicality of LTV ratios is robust to controlling for various characteristics of loans, borrowers, and lenders. We also find that borrowers that obtained high-LTV loans performed no worse ex-post than those with low-LTV loans, and performed better during the bubble period. These findings cast doubt on the conventional wisdom that banks adopted more lax lending standards during the bubble period, although we have other evidence in support of that story. We also draw some implications for the ongoing debate on the use of LTV ratio caps as a macroprudential policy measure.

Suggested Citation

  • Ono, Arito & Uchida, Hirofumi & Udell, Gregory & Uesugi, Iichiro, 2013. "A Close Look at Loan-To-Value Ratios: Evidence from the Japanese Real Estate Market," Working Paper Series 19, Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:cinwps:19
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/25465/ifn_wp019.pdf
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    References listed on IDEAS

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    Cited by:

    1. Sylvain Benoit & Jean-Edouard Colliard & Christophe Hurlin & Christophe Pérignon, 2017. "Where the Risks Lie: A Survey on Systemic Risk," Review of Finance, European Finance Association, vol. 21(1), pages 109-152.
    2. Ran Zhang & Jing Zhang & Shuang Xu, 2015. "Determining pledged loan-to-value ratio: an option pricing perspective," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 1(1), pages 1-13, December.

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    More about this item

    Keywords

    loan-to-value (LTV) ratios; pro-cyclicality; bubble;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets

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