Mortgage innovation and house price booms

Claes Bäckman and Chandler Lutz

Journal of Urban Economics, 2025, vol. 145, issue C

Abstract: We study how mortgage innovation can cause a housing boom even within a robust regulatory framework and strictly enforced recourse borrowing. Specifically, we find that the 2003 introduction of interest-only (IO) mortgages in Denmark ignited a housing boom that increased house prices 36 percent. In line with IO loans lowering debt-service payments and relaxing payment-to-income constraints, results show higher IO loan uptake and house price growth in areas with greater ex-ante benefits of such mortgages. Overall, our results are relevant for the many countries where IO loans play a sizable role in mortgage finance.

Keywords: Interest only mortgages; Housing booms; Mortgage lending (search for similar items in EconPapers)
JEL-codes: G21 G51 R21 R30 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:juecon:v:145:y:2025:i:c:s0094119024000950

DOI: 10.1016/j.jue.2024.103725

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