Prime Borrowers and Financial Innovation in the Housing Boom and Bust

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

We use the introduction of interest-only (IO) mortgages in Denmark as a natural experiment to assess the impact of alternative mortgage products on house prices during the 2000s. We construct a model to show that lower amortization payments lead to an increase in credit demand by allowing for better consumption smoothing, even absent any shift in credit supply. In support of the model, we find that the introduction of interest-only mortgages was followed by a large increase in the number of buyers, even as credit quality remained constant. On the aggregate level the results indicate that interest-only mortgages amplified the boom-bust pattern in housing: house prices increased an additional 35 percent during the boom due to IO loans, and subsequently reverse during the bust. These effects, which cannot be explained by changes in lending standards or shifts in credit supply, are magnified in local housing markets with higher ex-ante house price expectations. Together, the findings document the consequences of introducing IO loans on the micro- and macro level, and illustrates how new mortgage products can have large impacts even in the absence of a shift in credit supply
Original languageEnglish
Publication date2016
Number of pages58
Publication statusPublished - 2016
Event2016 European Winter Meeting of the Econometric Society - University of Edinburgh, Edinburgh, United Kingdom
Duration: 10 Dec 201611 Dec 2016
http://conferences.hss.ed.ac.uk/econometrics/

Conference

Conference2016 European Winter Meeting of the Econometric Society
LocationUniversity of Edinburgh
CountryUnited Kingdom
CityEdinburgh
Period10/12/201611/12/2016
Internet address

Keywords

  • Interest only mortgages
  • Housing boom and bust

Cite this

Bäckman, C., & Lutz, C. (2016). Prime Borrowers and Financial Innovation in the Housing Boom and Bust. Paper presented at 2016 European Winter Meeting of the Econometric Society, Edinburgh, United Kingdom.
Bäckman, Claes ; Lutz, Chandler. / Prime Borrowers and Financial Innovation in the Housing Boom and Bust. Paper presented at 2016 European Winter Meeting of the Econometric Society, Edinburgh, United Kingdom.58 p.
@conference{8966d101be954dd48cf92af45f994715,
title = "Prime Borrowers and Financial Innovation in the Housing Boom and Bust",
abstract = "We use the introduction of interest-only (IO) mortgages in Denmark as a natural experiment to assess the impact of alternative mortgage products on house prices during the 2000s. We construct a model to show that lower amortization payments lead to an increase in credit demand by allowing for better consumption smoothing, even absent any shift in credit supply. In support of the model, we find that the introduction of interest-only mortgages was followed by a large increase in the number of buyers, even as credit quality remained constant. On the aggregate level the results indicate that interest-only mortgages amplified the boom-bust pattern in housing: house prices increased an additional 35 percent during the boom due to IO loans, and subsequently reverse during the bust. These effects, which cannot be explained by changes in lending standards or shifts in credit supply, are magnified in local housing markets with higher ex-ante house price expectations. Together, the findings document the consequences of introducing IO loans on the micro- and macro level, and illustrates how new mortgage products can have large impacts even in the absence of a shift in credit supply",
keywords = "Interest only mortgages, Housing boom and bust , Interest only mortgages, Housing boom and bust",
author = "Claes B{\"a}ckman and Chandler Lutz",
year = "2016",
language = "English",
note = "null ; Conference date: 10-12-2016 Through 11-12-2016",
url = "http://conferences.hss.ed.ac.uk/econometrics/",

}

Bäckman, C & Lutz, C 2016, 'Prime Borrowers and Financial Innovation in the Housing Boom and Bust' Paper presented at, Edinburgh, United Kingdom, 10/12/2016 - 11/12/2016, .

Prime Borrowers and Financial Innovation in the Housing Boom and Bust. / Bäckman, Claes; Lutz, Chandler.

2016. Paper presented at 2016 European Winter Meeting of the Econometric Society, Edinburgh, United Kingdom.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - Prime Borrowers and Financial Innovation in the Housing Boom and Bust

AU - Bäckman, Claes

AU - Lutz, Chandler

PY - 2016

Y1 - 2016

N2 - We use the introduction of interest-only (IO) mortgages in Denmark as a natural experiment to assess the impact of alternative mortgage products on house prices during the 2000s. We construct a model to show that lower amortization payments lead to an increase in credit demand by allowing for better consumption smoothing, even absent any shift in credit supply. In support of the model, we find that the introduction of interest-only mortgages was followed by a large increase in the number of buyers, even as credit quality remained constant. On the aggregate level the results indicate that interest-only mortgages amplified the boom-bust pattern in housing: house prices increased an additional 35 percent during the boom due to IO loans, and subsequently reverse during the bust. These effects, which cannot be explained by changes in lending standards or shifts in credit supply, are magnified in local housing markets with higher ex-ante house price expectations. Together, the findings document the consequences of introducing IO loans on the micro- and macro level, and illustrates how new mortgage products can have large impacts even in the absence of a shift in credit supply

AB - We use the introduction of interest-only (IO) mortgages in Denmark as a natural experiment to assess the impact of alternative mortgage products on house prices during the 2000s. We construct a model to show that lower amortization payments lead to an increase in credit demand by allowing for better consumption smoothing, even absent any shift in credit supply. In support of the model, we find that the introduction of interest-only mortgages was followed by a large increase in the number of buyers, even as credit quality remained constant. On the aggregate level the results indicate that interest-only mortgages amplified the boom-bust pattern in housing: house prices increased an additional 35 percent during the boom due to IO loans, and subsequently reverse during the bust. These effects, which cannot be explained by changes in lending standards or shifts in credit supply, are magnified in local housing markets with higher ex-ante house price expectations. Together, the findings document the consequences of introducing IO loans on the micro- and macro level, and illustrates how new mortgage products can have large impacts even in the absence of a shift in credit supply

KW - Interest only mortgages

KW - Housing boom and bust

KW - Interest only mortgages

KW - Housing boom and bust

M3 - Paper

ER -

Bäckman C, Lutz C. Prime Borrowers and Financial Innovation in the Housing Boom and Bust. 2016. Paper presented at 2016 European Winter Meeting of the Econometric Society, Edinburgh, United Kingdom.