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Does Location Matter? Evidence on Differential Mortgage Pricing in Israel

Natalya Presman () and Nitzan Tzur-Ilan
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Natalya Presman: bank of Israel

No 2019.14, Bank of Israel Working Papers from Bank of Israel

Abstract: Abstract This paper explores the contribution of various factors to determining mortgage interest rates in Israel. We use a unique database combining loan-level data on mortgage loans originated by the Israeli banking system during 2010–13 with proprietary data on assets underlying mortgage origination as well as several additional variables designed to capture risk associated with regional real estate markets and the extent of competition prevailing in the banking system. We show that significant differences exist in real mortgage interest rates among different locations and neighborhood qualities. While homebuyers purchasing assets in the more prosperous central neighborhoods pay the lowest interest rates, those purchasing assets in the peripheral and economically weak neighborhoods pay the highest ones. Observable characteristics of the borrower, the mortgage and the underlying asset risk, and banking competition explain up to two thirds of the regional and socioeconomic differences in mortgage interest rates found in the raw data. Other factors that may explain remaining regional differences in the interest rates include unobservable borrower characteristics such as financial literacy and bargaining ability, unknown characteristics of borrower's employment and statistical discrimination of some groups of borrowers.

Pages: 44 pages
Date: 2019-11
New Economics Papers: this item is included in nep-ara, nep-ban, nep-fle and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2019.14.pdf First version, 2019 (application/pdf)

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