Mortgage Interest Rate Dispersion in the Euro Area

34 Pages Posted: 3 Mar 2007

See all articles by Christoffer Kok

Christoffer Kok

European Central Bank (ECB)

Jung-Duk Lichtenberger

European Central Bank (ECB)

Date Written: February 2007

Abstract

Despite the remarkable economic and financial convergence over the last ten years in the euro area, mortgage interest rates still differ across countries. This note presents some stylised facts on the heterogeneity of mortgage interest rates across euro area countries on the basis of the Eurosystem's harmonised MFI interest rate statistics. We also attempt to provide some insights into the reasons behind these cross-country differences using the methodology recently proposed by Affinito and Farabullini (2006). We differ from Affinito and Farabullini (2006) in that we focus on one particular banking market: the market for mortgage loans. This allows us to identify more clearly the role of specific structural features characterising that market in explaining mortgage rate dispersion. More specifically, we investigate the extent to which various mortgage loan demand and supply determinants help explaining the observed dispersion. It turns out that some of the heterogeneity can be explained by these factors, in particular those that relate to the supply side. However, a substantial part of the dispersion remains unexplained suggesting that much of the heterogeneity also reflects country-specific institutional differences that are likely to be caused by differences in the regulatory and fiscal framework of the mortgage markets. In order to test this, we extend our analysis to also include institutional factors and indeed find that cross-country differences in enforcement procedures, tax subsidies and loan-to-value ratios influence the level of mortgage rates.

Keywords: Mortgage markets, bank interest rates, euro area countries, financial integration, panel econometrics

JEL Classification: C23, E4, F36, G21, N24

Suggested Citation

Kok, Christoffer and Lichtenberger, Jung-Duk, Mortgage Interest Rate Dispersion in the Euro Area (February 2007). ECB Working Paper No. 733. Available at SSRN: https://ssrn.com/abstract=963151

Christoffer Kok (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jung-Duk Lichtenberger

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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