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The Amortization Elasticity of Mortgage Demand

Author

Listed:
  • Claes Bäckman

    (Department of Economics and Business Economics, Aarhus University, and Knut Wiksell Center for Financial Studies, Lund University)

  • Peter van Santen

    (Faculty of Economics and Business, University of Groningen)

Abstract
We study how amortization payments affect household borrowing exploiting notches in the Swedish amortization requirement. We argue that amortization payments are costly for borrowers under a number of scenarios, and that they therefore affect credit demand. We provide causal evidence that a percentage point increase in amortization payments reduce LTV ratios by 2-3 percentage points, implying a sizable amortization elasticity of mortgage demand. Borrowers who seek to avoid making payments generally have higher debt, higher income and higher debt-to-income ratios. On the aggregate level, credit growth falls sharply after the introduction of the amortization requirement.

Suggested Citation

  • Claes Bäckman & Peter van Santen, 2020. "The Amortization Elasticity of Mortgage Demand," Economics Working Papers 2020-16, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:aarhec:2020-16
    as

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    File URL: https://repec.econ.au.dk/repec/afn/wp/20/wp20_16.pdf
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    References listed on IDEAS

    as
    1. Michael Carlos Best & James S Cloyne & Ethan Ilzetzki & Henrik J Kleven, 2020. "Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(2), pages 656-690.
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    5. Edward L. Glaeser & Joshua D. Gottlieb & Joseph Gyourko, 2012. "Can Cheap Credit Explain the Housing Boom?," NBER Chapters, in: Housing and the Financial Crisis, pages 301-359, National Bureau of Economic Research, Inc.
    6. Mark J. Garmaise, 2013. "The Attractions and Perils of Flexible Mortgage Lending," The Review of Financial Studies, Society for Financial Studies, vol. 26(10), pages 2548-2582.
    7. David Laibson, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 443-478.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Amortization requirements; Macroprudential policy; Household debt;
    All these keywords.

    JEL classification:

    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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