Evidence on the Demand for Mortgage Debt by Owner-Occupants

Ling, David C.; McGill, Gary A.

doi:10.1006/juec.1997.2079

Cited by 70 publications

(99 citation statements)

References 22 publications

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“…Secondly, in countries where the interest payments are deductible from income (like the Netherlands 6 and the US), theory predicts that the demand for mortgage debt will increase considerably (Brueckner, 1994;Ling and McGill, 1998;Hendershott et al, 2002). If mortgage interest rates are lower or on the same level as the interest rate on savings, households will not save up money to invest in a home, but purchase the home outright using the highest mortgage debt possible 7 .…”

Section: Literature Review Of Credit Modelsmentioning

confidence: 99%

The Effect of Credit Conditions on the Dutch Housing Market

2014

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract It is widely perceived that the supply of mortgages, especially since the extensive liberalization of the mortgage market since the 1980s, has had implications for the housing market in the Netherlands. In this paper we introduce a new method to estimate a credit condition index (CCI). The CCI represents changes in the supply of credit over time, apart from changes in interest rates and income. It has been estimated by an unobserved component in an error-correction model in which the average amount of new provided mortgages per period is explained by the borrowing capacity and additional control variables. The model has been estimated on data representing first time buyers (FTB). For Terms of use: Documents in EconStor may

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Section: Literature Review Of Credit Modelsmentioning

confidence: 99%

The Effect of Credit Conditions on the Dutch Housing Market

2014

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“…They find that the elasticity of mortgage debt with respect to an income tax rate change is between −1.5 and −3.5 depending on the year of data used in estimation. Using data from the American Housing Survey, Ling and McGill (1998) show the rate of tax savings on mortgage interest is a significant determinant of the amount of mortgage debt. They find that owners with a lower average rate of tax savings (measured by the amount of housing related deductions that potentially go unused) from the MID have significantly lower demand for mortgage debt.…”

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Size of home, homeownership, and the mortgage interest deduction

Hanson

2012

Journal of Housing Economics

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“…As a result, we partition our sample along these lines to see how the response to the penalty varies. where4 Most of the recent literature explains the quantity of mortgage debt and housing demand in a simultaneous equation framework Dunsky, 1997, andMcGill, 1998). Our formulation avoids the necessity of estimating the housing demand relationship.…”

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confidence: 99%

“…Thus estimating the penalty for individual households is complicated. Second, it is almost a universal law that LTVs on newly-originated loans are bounded between (are truncated/censored at) zero and one (debt is bounded between zero and house value).Moreover, initial LTVs of first-time home buyers are highly skewed toward the highest lender-permitted LTV (Hendershott, Pryce and White, 2003), while as many as half of older homeowners have zero LTVs (Ling and McGill, 1998). The upper bound of unity or the lender-permitted maximum constitutes credit rationing.…”

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confidence: 99%

“…Second, the standard deduction was sharply increased. Finally, the 1986 act also phased out itemized deductions when household income rose above threshold levels, limiting deductibility for very high income households to as little as 20 percent of their interest paid.Follain, Ling, and various associates have used the change in the effective deductibility of mortgage interest induced by the 1986 tax act to test the hypothesis that household leverage is sensitive to the tax penalty on debt (Follain and Ling, 1991, Ling and McGill, 1998, Follain and Dunsky, 1997, and Dunsky and Follain, 2000. In each case, the leverage of individual households was found to be related significantly to the effective deductibility of mortgage interest.…”

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confidence: 99%

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The Sensitivity of Homeowner Leverage to the Deductibility of Home Mortgage Interest

Hendershott

Pryce

2005

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Mortgage interest tax deductibility is needed to treat debt and equity financing of homes equally.Countries that limit deductibility create a debt tax penalty that presumably leads households to shift from debt toward equity financing. The greater the shift, the less is the tax revenue raised by the limitation and smaller is its negative impact on housing demand. Measuring the financing response to a legislative change is complicated by the fact that lenders restrict mortgage debt to the value of the house (or slightly less) being financed. Taking this restriction into account reduces the estimated financing response by 20 percent (a 32 percent decline in debt vs a 40 percent decline). The estimation is based on 86,000 newly originated UK loans from the late 1990s. The Sensitivity of Household Leverage to the Deductibility of Home Mortgage InterestIn many economies debt financing of housing is penalized relative to equity financing, i.e., interest payments are not fully tax deductible. In the Commonwealth countries -Australia, Canada, New Zealand, and the UK (since 1999) -interest is not deductible; in most European countries (the UK in the quarter century prior to 1999) interest is only partially deductible, being limited by a ceiling on the deductible amount, application of a lower tax rate to the deduction, or both. As a result, the Modigliani-Miller (1958) debt neutrality theorem does not hold; the user cost of capital for owner-occupied housing (through the weighted average cost of capital) is not independent of LTV choice. 1 Knowing how LTVs respond to deductibility limits is thus crucial to understanding how housing choices will be affected by changes in such limits.There are two fundamental problems in explaining LTV behavior. First, the tax penalty on debt usage depends on intricate tax law provisions and the level of debt usage itself. For example, in the UK during the decade 1983-92, there was a penalty only for loan amounts above £30,000, and between 1993and 1999 for some households there was also a penalty for loans below £30,000. In the U.S., a penalty exists for some low-income households, households with low mortgage debt living in states with low house prices and low taxation, and quite high-income households. Thus estimating the penalty for individual households is complicated. Second, it is almost a universal law that LTVs on newly-originated loans are bounded between (are truncated/censored at) zero and one (debt is bounded between zero and house value).Moreover, initial LTVs of first-time home buyers are highly skewed toward the highest lender-permitted LTV (Hendershott, Pryce and White, 2003), while as many as half of older homeowners have zero LTVs (Ling and McGill, 1998). The upper bound of unity or the lender-permitted maximum constitutes credit rationing. Because the economic response to a debt penalty is to reduce debt, the more a borrower is rationed, the less his response to a given penalty will be. The combined effect of LTVs suffering from both truncation and a highly skew...

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Evidence on the Demand for Mortgage Debt by Owner-Occupants

Cited by 70 publications

References 22 publications

The Effect of Credit Conditions on the Dutch Housing Market

The Effect of Credit Conditions on the Dutch Housing Market

Size of home, homeownership, and the mortgage interest deduction

The Sensitivity of Homeowner Leverage to the Deductibility of Home Mortgage Interest

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