Mortgage Innovation and House Price Booms

Abstract

We study how mortgage product innovation can cause a housing boom even with a robust regulatory mortgage lending framework and strictly enforced recourse borrowing. We show that the introduction of IO mortgages in Denmark in 2003 ignited a housing boom and caused house prices to increase by 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 with elevated IO mortgage use and a robust regulatory framework.

Keywords: Interest Only Mortgages, Housing Booms; Mortgage Lending

JEL Classification: G51, G21, R21, R30