Why has the mortgage debt increased by so much in Canada?

Mario Fortin ()

Cahiers de recherche from Departement d'économique de l'École de gestion à l'Université de Sherbrooke

Abstract: This paper estimates a reduced form model of the Canadian mortgage demand from 1971 to 2010. Three equations are estimated, one for the average real value of new mortgage loans originated, another one for the number of new loans and a third for the flow of real repayment of existing loans. The results show that the nominal interest rate is the main source of change in the number of new loans while real housing price is the main determinant of the value of new loans. Two other variables, the real per-capita disposable income and the inflation rate, are also significant in changing the flow of new loans originated. A fall in the inflation rate accompanied by a concomitant reduction in the interest rate is in average the main source of increase in households' mortgage debt, because it increase the flow of new loans and at the same time reduces the rate of repayment of existing loans. Between 2000 and 2007, the unprecedented increase in real housing price while inflation was stable became the main factor behind the rise in mortgage debt, mostly because the average mortgage debt increased significantly. After that, the reduction in the interest rate sustained an increase in the number of new loans. The model does not find indications that a change in the supply side of the mortgage market played a significant role in the increased level of mortgage debt.

Keywords: Mortgage market; household debt; Canada (search for similar items in EconPapers)
JEL-codes: D14 D91 E44 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2015-02
New Economics Papers: this item is included in nep-mac, nep-mfd and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:shr:wpaper:15-03

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