The Sensitivity of Housing Demand to Financing Conditions: Evidence from a Survey

52 Pages Posted: 9 Dec 2014 Last revised: 6 Aug 2015

See all articles by Andreas Fuster

Andreas Fuster

Swiss National Bank - Financial Stability

Basit Zafar

Arizona State University

Date Written: August 2015

Abstract

The sensitivity of housing demand to mortgage rates and available leverage is key to understanding the effect of monetary and macroprudential policies on the housing market. However, since there is generally no exogenous variation in these variables that is independent of confounding factors (such as economic conditions or household characteristics), it is difficult to cleanly estimate these sensitivities empirically. We circumvent these issues by designing a strategic survey in which respondents are asked for their willingness to pay (WTP) for a home comparable to their current one, under different financing scenarios. We vary mortgage rates, down payment constraints, and non-housing wealth. We find that a relaxation of down payment constraints, or an exogenous increase in non-housing wealth, has large effects on WTP, especially for relatively poorer and more credit-constrained borrowers. On the other hand, changing the mortgage rate by 2 percentage points only changes WTP by about 5 percent on average. These findings have implications for theoretical models of house price determination, as well as for policy.

Keywords: housing demand, mortgage rates, down payment requirements, user cost model

JEL Classification: E44, G21, R21

Suggested Citation

Fuster, Andreas and Zafar, Basit, The Sensitivity of Housing Demand to Financing Conditions: Evidence from a Survey (August 2015). FRB of New York Staff Report No. 702. Available at SSRN: https://ssrn.com/abstract=2535912 or http://dx.doi.org/10.2139/ssrn.2535912

Andreas Fuster (Contact Author)

Swiss National Bank - Financial Stability ( email )

Boersenstrasse 15
Zurich, CH-8022
Switzerland

Basit Zafar

Arizona State University ( email )

WP Carey School of Business, ASU
Tempe, AZ 85287
United States
9179326564 (Phone)

HOME PAGE: http://https://sites.google.com/site/basitakzafar/

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