Mortgage credit and house prices

Mortgage credit and house prices: The housing market equilibrium revisited

van der Drift, R. (TU Delft Real Estate Management)
de Haan, J.G. (TU Delft Structural Integrity & Composites)
Boelhouwer, P.J. (TU Delft Real Estate Management)

2023

Over the last decade, house prices have increased substantially in nearly all OECD countries. These house price increases frequently coincided with changes in mortgage credit conditions; i.e., decreases in the interest rate and increases in income. This is in line with existing literature, which finds an equilibrium relationship between mortgage credit and house prices. The literature, however, lacks an analysis of what drives the equilibrium, which we assess in this paper. Moreover, we propose a combination of two explanations discussed in the literature. That is, we argue that lower-income households are bound by credit constraints, while higher-income households have a preference for spending a fixed fraction of income on mortgage payments. We develop theoretical models for all three explanations and test the models using data on the Dutch property market. The empirical results clearly support the combined approach. Overall, the results suggest that it is important to differentiate between types of households when forecasting house prices or assessing the effectiveness of policy interventions.

Cointegration
Debt-service-to-income ratio
Fundamentals
House prices

http://resolver.tudelft.nl/uuid:2604e307-73dd-42b5-a2d2-aa781615c8b8

https://doi.org/10.1016/j.econmod.2022.106136

0264-9993

Economic Modelling, 120

Institutional Repository

journal article

© 2023 R. van der Drift, J.G. de Haan, P.J. Boelhouwer