Mortgage Innovation and House Price Booms

Journal of Urban Economics, volume 145, 2025[10.1016/j.jue.2024.103725]

75 Pages Posted: 7 Dec 2015 Last revised: 6 Feb 2025

See all articles by Claes Bäckman

Claes Bäckman

Leibniz Institute for Financial Research SAFE

Chandler Lutz

The University of North Carolina at Charlotte

Date Written: May 15, 2024

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

JEL Classification: G51, G21, R21, R30

Suggested Citation

Bäckman, Claes and Lutz, Chandler, Mortgage Innovation and House Price Booms (May 15, 2024). Journal of Urban Economics, volume 145, 2025[10.1016/j.jue.2024.103725], Available at SSRN: https://ssrn.com/abstract=2699824 or http://dx.doi.org/10.1016/j.jue.2024.103725

Claes Bäckman

Leibniz Institute for Financial Research SAFE ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt, 60323
Germany

Chandler Lutz (Contact Author)

The University of North Carolina at Charlotte ( email )

9201 University City Blvd
Charlotte, NC 28223
United States

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