Housing appreciations and the (in)stable relation between housing and mortgage markets

Borgersen, Trond-Arne

doi:10.1080/14616718.2015.1069080

Cited by 7 publications

(10 citation statements)

References 41 publications

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“…The optimal LTV-ratio is (again) found by considering de / dλ = 0. Taking the derivative of expression 2’ with respect to the LTV-ratio, and inserting for the two relations argued above, we find: we consider three stylized regimes characterized by the different relations between housing and mortgage markets sketched by Borgersen (2016). During a housing boom , appreciations might be due to both market fundamentals and the prevailing mortgage policy.…”

Section: The Optimal Ltv-ratiomentioning

confidence: 93%

The optimal LTV-ratio, mortgage market variability and monetary policy regimes

Borgersen

2017

JFEP

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Purpose The purpose of this paper is twofold: first, it derives the optimal loan-to-value (LTV)-ratio for a mortgagor that maximizes the return to home equity when considering the capital structure of housing investment. Second, it analyses the demand-side contribution to mortgage market variability across monetary policy regimes. Design/methodology/approach The paper endogenizes both the relation between the LTV ratio and the mortgage rate and the relation between LTV and the rate of appreciation. When we consider LTV-variance and the demand-side contribution to mortgage market variability, three stylized regimes is considered. Findings The paper finds an intuitive ranking of the optimal LTV-ratios across regimes, and the optimal LTV-ratio peaks during a housing boom. When, however, monetary policy ignores asset inflation the demand-side contribution to market variability is highest during normal market conditions. Hence, there is a potentially hump-shaped relation between the risk exposure of individual mortgagors and the demand-side contribution to mortgage market variability. Originality/value The paper finds a potentially hump-shaped relation between the risk exposure of individual mortgagors and the demand-side contribution to mortgage market variability, which, to the best of our knowledge, is novel. The paper shows how macro-prudential and monetary policy are complementary tolls for preserving financial stability.

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Section: The Optimal Ltv-ratiomentioning

confidence: 93%

The optimal LTV-ratio, mortgage market variability and monetary policy regimes

Borgersen

2017

JFEP

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“…For a mortgagee is debt-servicing ability the firstline of defence against credit-risk. Borgersen (2016) shows how a mortgagee might be willing to step away from the first-line of defence and allow collateral (the second-line of defence) to govern supply when the rate of appreciation exceeds a critical limit. In the following we assume appreciations to exceed this limit.…”

Section: B Housing Careersmentioning

confidence: 99%

“…Rothenberg et al (1991) states "Housing market events and government policy initiatives which impact one submarket will have their primary effects in that submarket, with secondary effects appearing in other submarkets to the extent those submarkets are linked in substitution possibilities with the original submarket" (Rothenberg, 1991, p. 48) Substitution effects might be important between some segments, while equity effects might be important between segments (See Lee and Ung (2005) or Røed-Larsen (2010b) for the role of equity). Our frame of reasoning draws on Borgersen (2016Borgersen ( , 2014aBorgersen ( , 2014b. We consider a housing market that contains two segments for owner-occupied housing, starter and family homes, and is characterised by a housing ladder where a starter home is the first-step on the ladder.…”

Section: Introductionmentioning

confidence: 99%

“…Normally are both debt-servicing ability and collateral important for a household's ability to attract external finance. Borgersen (2016) shows that even though a mortgagor consider debt-servicing ability to be the first-line of defence against credit risk exposure, it might be willing to allow collateral to govern supply when housing appreciations exceed a critical limit. For a household trading-up the housing ladder from a starter to a family home both prevailing equity (the starter home price) and the purchasing price (the family home price) and, correspondingly, the debt-to-equity-ratio, might be affected by SHP.…”

Section: Introductionmentioning

confidence: 99%

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Social Housing Policy in a Segmented Housing Market: Indirect Effects on Markets and on Individuals

Borgersen¹

2019

IJoES

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This paper analyses indirect effects of social housing policy (SHP) in a segmented housing market. A two segment-housing ladder, where equity determines up trading, shows how SHP-measures targeting either housing supply or housing demand impact market developments and individual housing careers. When addressing market developments the paper considers house prices and housing supply. Analysing housing careers we highlights the ability of households indirectly exposed to SHP to trade up a housing ladder. The segmented housing market model contains both multipliers, along the lines of the Balanced Budget Multiplier of Haavelmo (1945), and non-neutral price effects across segments. These features allow some novel results when discussing indirect effects of SHP. Relating SHP to up-trading and a housing ladder where households simultaneously act as buyers and sellers, we first of all show the effect of SHP on the supply of used homes, an important part of housing supply. Second, this framework makes us able to position crowding-out across market segments. Both features are novel in the SHP-discussion. The paper also shows how SHP might create negative indirect effects on the up-trading ability of households that do not benefit from SHP measures.

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“…When house prices are driven by fundamentals, and not the endogenous credit constraint (see for instance Borgersen (2016)), the collateral effect is missing. A credit risk policy dominated by debt-servicing ability and the first-line of defense ensures such a scenario (Borgersen, 2016). Finally, policies to reduce the lending effect are contingent on the moral hazard intensity.…”

Section: >>>>>>>>>>>>>>>>>>> Figure 2 >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>mentioning

confidence: 99%

Mortgage supply, LTV and risk pricing

Borgersen

2017

International Journal of Housing Policy

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This paper highlights the contributions from the supply side of mortgage markets to the variations in the LTV-ratio. The paper starts by deriving the optimal LTV-ratio for a profit maximizing mortgagee that supply mortgages using housing as collateral. As the LTV-ratio represents the risk exposure of a mortgagee, the optimal LTV-ratio varies according to moral hazard, risk pricing, funding structure, lending volume and collateral value. Thinking in terms of social welfare, the optimal LTV-ratio is our model one where mortgagees are paid for their risk exposure. Our framework allows us to see how different supply side components create a wedge between the profit maximizing LTV-ratio and the socially optimal LTV-ratio. It also allows for rather straightforward arguments regarding macro-prudential policy. The paper continues by analyzing a mortgage's risk pricing response to falling house prices and an LTVratio that exceeds the LTV-ratio at origination. The paper derives a kinked relation between the mortgage rate and the LTV-ratio ex post, distinguishing between risk pricing ex ante and ex post.

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Housing appreciations and the (in)stable relation between housing and mortgage markets

Cited by 7 publications

References 41 publications

The optimal LTV-ratio, mortgage market variability and monetary policy regimes

The optimal LTV-ratio, mortgage market variability and monetary policy regimes

Social Housing Policy in a Segmented Housing Market: Indirect Effects on Markets and on Individuals

Mortgage supply, LTV and risk pricing

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