Prime Borrowers and Financial Innovation in the Housing Boom and Bust

Claes Bäckman, Chandler Lutz

Research output: Contribution to conferencePaperResearchpeer-review


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


Conference2016 European Winter Meeting of the Econometric Society
LocationUniversity of Edinburgh
CountryUnited Kingdom
Internet address


  • Interest only mortgages
  • Housing boom and bust

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