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A comment on the procyclicality of mortgage lending

A comment on the procyclicality of mortgage lending. Trond-A. Borgersen, Østfold University & Karl Robertsen, Agder University ERES 2009, Stockholm. Disposision. 1. Motivation The Norwegain case 2. Model Regime shifts 3. Empirical analysis (short) Results/regimes 4. Conclusions.

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A comment on the procyclicality of mortgage lending

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  1. A comment on the procyclicality of mortgage lending Trond-A. Borgersen, Østfold University & Karl Robertsen, Agder University ERES 2009, Stockholm

  2. Disposision • 1. Motivation • The Norwegain case • 2. Model • Regime shifts • 3. Empirical analysis (short) • Results/regimes 4. Conclusions

  3. Norwegian housing market Nominal- and real house prices 12-mth. growth in house prices

  4. Households: Debt-to-income ratio Source: Kredittilsynet (2008)

  5. Debt-to-income, home-loan survey Source: Kredittilsynet (2008)

  6. Home-loan survey: mortgage market developments • Share of home mortgage loans in various LTV categories • Source: Kredittilsynet (2008)

  7. Home-loan survey: mortgage market developments • Loan periods for various LTV-ratios • Source: Kredittilsynet (2008)

  8. Focus of the paper • Mortgage market developements: • Less weight given to debt-to-income and more weight given to collateral • How are these developments in the mortgage market related to the house price cycle?

  9. Assume.. • Lenders are myopic, i.e. care only about next period expected return • Endogenous credit constraint governs lending • Exogenous house price process (for now) • Expectations are adaptive • The alternative rate of return impacts on mortgage lending

  10. The housingdemandofcreditconstrainedhouseholds • Endogenous credit constraint • Housing investments • Financial savings • Liquidity contraint

  11. Housing demand.. • Depend on: user cost (the inverse-) and households net worth

  12. Regimes • Regime 1: Modest house price growth • That is: • Condition for :

  13. Regimes.. • Regime 2: Strong house price growth • That is • Even so: It is possible that when

  14. Empirical analysis • LSTR-modell (logistisk smoothtransitionregression, allowing for regime shiftsbetweenhousepricegrowth and the alternative rate ofreturn (theinterest rate) • National Accounts(1987k1 - 2008k3) • Focus: The relationshipbetweenhouseholddebt, collateral and debt-to-income at theaggregatelevel

  15. Data

  16. Empirical model • Model • Transision • Debt-to-income, relative to it’s average

  17. Transision • Regimes: Situation (1): Strong house price growth . Situation (2): Modest house price growth

  18. Conclusions/Results • LSTR-1 identifiestwo regimes for therelationshipbetweenthehousing market and the mortgage market • Regimes shift is significant for therelationshipbetween mortgage debt and debt-to-income: • Modest housepricegrowth, bothdebt-to-income and collateralimpacts mortgage debtnegatively • Stronghousepricegrowth, mortgage debtincreases in thedebt-to-income ratio • Even in theperiod 2004Q1-2008Q3 wheredebt-to-income is abovelong-termaverage • Credit driven housing market bubble

  19. Conclusions • Potential regime shifts in mortgage market structuresaccording to thehousepricecycle • due to endogenouscreditconstraints and adaptive expectations • LTV-ratios <100 % whenhousepricegrowth is modest, and LTV-ratios >100 % whenpricegrowth is strong • Whenarepro-cycliceffectslikely? • weakinternal guidelines for risk assesments and/or increasedcompetition for mortgage market shares • adaptive expectationsareallowed to governboththedemand for housing and thesupplyof mortgage financing • Highlightstheimportanceofstronginternal guidelines for credit risk assessments ,taking intoaccountbothcollateral and debt-to-income

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