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
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: Suggested Citation