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The economic consequences of mortgage debt

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Abstract

Unsurprisingly, a great deal of attention has been paid to the economic consequences of the credit crunch. However, this paper shows that the credit crunch was preceded by a strong build-up of mortgage debt internationally, which, in the long run, could turn out to be more significant than the credit crunch itself. Indeed, the debt build-up suggests that the credit crunch is more likely to reoccur, because highly-indebted households have weaker buffers to withstand unexpected shocks to their incomes or to interest rates. The paper presents a model that can explain the debt build-up and changes to the distribution of debt between existing owners and first-time buyers, which hinders access to home-ownership for the latter, even amongst those households who would be considered as credit-worthy.

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Notes

  1. USA, Germany, France, Italy, UK, Austria, Belgium, Denmark, Spain, Finland, Ireland, Netherlands, Norway and Sweden. Data are taken from the OECD house price data base.

  2. Since the published reference years for owner-occupation rates vary across countries, the debt/GDP ratios for the corresponding years are used.

  3. However, these countries have paid greater attention to covered bonds in the fall-out from the credit crunch.

  4. Although the initial establishment of the market dates back to the mid-80s.

  5. For Australia, Reserve Bank estimates are used.

  6. This holds on UK data. See, for example, Meen (2008).

  7. Taken to be bank and building society deposits and national savings.

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Authors and Affiliations

  1. Department of Economics, University of Reading, Whiteknights, Reading, RG6 6AW, UK

    Geoffrey Meen

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  1. Geoffrey Meen
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Correspondence to Geoffrey Meen.

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Meen, G. The economic consequences of mortgage debt. J Hous and the Built Environ 26, 263–276 (2011). https://doi.org/10.1007/s10901-011-9225-x

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  • DOI: https://doi.org/10.1007/s10901-011-9225-x

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