We examine whether household sentiment can explain fluctuations in newly issued consumer loans. We construct a novel measure of household sentiment using detailed data from the harmonized consumer surveys conducted in European countries. We differentiate between rational sentiment, which mimics dynamics in macroeconomic fundamentals, and irrational sentiment, which proxies households’ optimism/pessimism on top of their rationally sourced beliefs. We show that shocks to the sentiment of households do have a measurable impact on growth of consumer loans. Specifically, we assert a significantly positive role of irrational sentiment on top of the economic fundamentals identified in the literature. Moreover, a closer examination reveals that the studied relationship is not symmetric over the business cycle — the effect of irrational sentiment is present only in periods in which a country’s output is well above its potential.

We analyze the impact of easing borrower-based measures on residential mortgage credit and borrower characteristics in the Czech Republic in early 2020. This easing included a relaxation of the LTV limit and the abolition of the DTI and DSTI limits. Our findings indicate that affected households increased borrowing, purchased more expensive houses, and accepted lower collateral values. Borrowers' debt service burdens rose but were offset by income growth. We find that: (i) LTV-constrained borrowers exhibited cash-retention behavior, while DTI- and DSTI-constrained borrowers aligned with the financial accelerator motive; (ii) LTV relaxation had a greater effect in poorer counties, while the abolition of DTI and DSTI limits affected richer regions; (iii) younger borrowers were more impacted by LTV and DTI easing, whereas DSTI easing influenced older borrowers; and (iv) LTV relaxation primarily affected first-time borrowers, while the abolition of DTI and DSTI limits impacted repeat borrowers, who obtained larger mortgages and purchased more expensive properties.