Testing a theoretical model of mortgage demand on UK data

David Leece

Applied Economics, 2006, vol. 38, issue 17, 2037-2051

Abstract: Mortgage demand is a poorly understood and under-researched aspect of the financial behaviour of households. This paper tests empirically the basic results of Brueckner's model of mortgage demand on UK mortgage market data. The choice of mortgage instrument is used to identify impatient debt maximizers and patient borrowers who borrow at intermediate levels. Thus the research confirms the conditions under which households will use the largest possible mortgage and the circumstances under which savings are invested in the property. A unique contribution of the work is the estimation of mortgage demand equations corrected for endogenous housing demand, for a single housing finance system, where borrowers face different opportunity costs of equity in their owner occupied property, allowing a purer test of the theoretical model.

Date: 2006
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DOI: 10.1080/00036840500426959

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