RATIONING, MORTGAGE DEMAND AND THE IMPACT OF FINANCIAL DEREGULATION†
| DOI | http://doi.org/10.1111/j.1468-0084.1995.tb00026.x |
| Date | 01 February 1995 |
| Published date | 01 February 1995 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS,
57,1(
1995)
0305-9049
RATIONING, MORTGAGE DEMAND AND
THE
IMPACT
OF
FINANCIAL DEREGULATION'f
David
Leece
1.
INTRODUCTION
During the
1970's,
in the United Kingdom,
real
interest rates were negative,
and the availability and size of mortgages were rationed. The
1980's
has seen
the deregulation of financial markets and increased competition among the
providers of mortgage finance. Interest rate adjustments adopted a greater
role in maintaining equilibrium in the housing loan market. The influence of
interest rate changes, and other variables, upon the frequency and extent of
this major form of personal sector borrowing has important macroeconomic
implications (see Lee and Robinson,
1990).
Aggregate studies, however, may
disguise a variety
of
household responses
to
changes
in
mortgage market
conditions (Ranney,
198
1
).
Previous research on the demand
for
mortgages has used aggregate time
series data, usually including the estimated equations within broader models
of
the supply and demand for housing (Wilcox,
1985;
Hall and UNvin,
1989;
Meen,
1990).
The work reported here utilizes cross-section data taken from
the
1986
Family Expenditure Survey (FES).
A
cross-section study can
identify the impact
of
variations in demographic characteristics, regional
location, and differences in wealth, on mortgage demand. In addition, FES
data contains time varying elements such
as
the date
on
which a household
enters
a
property. This information is used to include interest rate variations,
and to attempt to detect any impact
of
the change in the mortgage market
from a rationing
to
a non-rationing regime. The research therefore seeks to
better understand the impact
of
credit rationing on household behaviour.
In order to take account
of
potential rationing the paper reports the results
of
estimating mortgage demand equations
in
the form
of
a 'double hurdle'
model (Cragg,
1971).
This approach separates the determinants
of
the
tl
would
like
to
thank Professor Ian Walker of the Department
of
Economics, University of
Keele. for his encouragement and guidance in the writing of this paper.
I
would
also
like
to
thank the Office
of
Population Censuses and Surveys and the ESRC data archive, University of
Essex, for allowing me
to
use the
1986
Family Expenditure Survey. Neither
of
these bodies
bear any responsibility for the further analysis and modification
of
the data.
43
Q
Basil Blackwell
Ltd.
1995.
Published
by
Blackwell Publishen.
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&
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44
BULLETIN
probability
of
desiring, and obtaining a mortgage contract, from the determi-
nants
of
the size
of
debt. The 'double hurdle' model has previously been used
in the study
of
individual commodity expenditures by households (Atkinson
et aL,
1984),
and in estimates
of
the impact
of
unemployment on female
labour supply (Blundell
et
al.,
1987).
The model contrasts with the usual
Tobit limited dependent variable model, where zero values for purchases are
observed, and treated as equilibrium observations in the same way as positive
values
of
the dependent variable.
Section
I1
considers the theoretical background to tenure choice, and the
demand for a mortgage. Life-cycle theory is used to motivate the modelling of
the demand for mortgage loans. Section
I1
considers important credit market
developments and the nature and presence of rationing in the
UK
mortgage
market over the period of study. The econometric specification and the data
are discussed
in
Sections
I1
and
I11
respectively. Results, incorporating tests of
the impact of the deregulation of financial markets in the data, are presented
in Section
IV,
11.
THE DETERMINANTS
OF
MORTGAGE DEMAND
The theoretical background
The paper considers
an
household's continuous demand for mortgage debt
conditional upon being offered, and accepting,
a
contract from a mortgage
provider. The
use
of
a
double hurdle model allows the observation
of
a
mortgage holder to be a function
of
both the probability of desiring a positive
amount, and the probability
of
obtaining the desired amount. The model thus
facilitates the testing
of
the impact
of
rationing upon household behaviour.
The presence
of
rationing and the need to consider influences on the prob-
ability
of
a
mortgage offer also means that variables can have a different
impact upon the likelihood
of
observing
a
mortgage compared
to
the choice
of
its
size.
The null hypothesis
is
that in a competitive market individuals not holding
a
mortgage are equilibrium observations, and that all borrowers obtain
mortgage balances consistent with life cycle plans.
To
test this hypothesis
a
theoretical and empirical specification is required which renders current
demand
for
mortgage debt consistent with life cycle planning.
Even
in the
presence
of
rationing borrowing may
be
motivated by life cycle considera-
tions. The null hypothesis will be tested by comparing the restricted version
of
the model (that is with the coefficients on all variables indicating rationing
restricted to
zero)
in the form
of
a
Tobit with a double hurdle model
incorporating the possibility
of
rationing effects.
Empirical work on housing choices has utilized measures
of
permanent
income (see Goodman,
1988).
Also, research in the United States has
demonstrated
a
strong link between home-ownership and stage of the life-
cycle (McCarthy,
1976;
Morgan,
1974).
However, theoretical models
0
Bail Blackwell
Ltd.
1995.
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