Housing finance is a hot topic across the developed and developing world, though for different reasons. With some developed economies just coming out of a housing slump and others still in the middle of it (including my current host country, the Netherlands), often caused by easy and excessive access to mortgage credit before the crisis, households in many developing countries suffer rather from a dearth of long-term financing options. To illustrate this discrepancy, total mortgage debt outstanding in the Netherlands is equivalent to 83% of GDP, whereas it amounts to less than one percent of GDP across many low- and lower-middle-income countries in Asia and Africa. What explains these differences? Are underdeveloped housing finance systems just a symptom of the general shallowness of financial systems across developing countries? Or are there country factors and policies that specifically explain underdeveloped mortgage markets?
In a recent paper with Anton Badev, Ligia Vado and Simon Walley, we try to answer some of these questions with new data on mortgage depth and penetration. Specifically, drawing on a painstaking exercise of putting together country-level information on the depth of mortgage finance systems across countries and over time and using the recent data on the use of housing finance in the Global Findex database, we explore factors explaining the large cross-country variation in housing finance across the world
One first striking observation is that housing finance seems to be a luxury good, as illustrated in Figure 1. Mortgage depth and housing loan penetration increase with countries’ income level in a convex manner, i.e. slow increases with income across low- and middle-income countries and rapid increases with income across high-income countries.
Figure 1: Mortgage Depth and Penetration across Income Groups
What explains cross-country variation in mortgage market development?
Running simple cross-sectional and panel regressions of mortgage depth and penetration on different country characters shows that policies associated with financial system development are also associated with mortgage market development, including price stability and the efficiency of contractual and information frameworks. We find that the development of the insurance sector and the stock market, sources of long-term funding, is strongly associated with mortgage market development. On the other hand, there is no clear evidence that government interventions such as subsidies, government guarantees or tax policies are helpful to develop the formal mortgage market, although these results are based on data mostly from high-income countries, given data restrictions. It is important to note that these findings do not imply any causality.
Benchmarking mortgage markets
When we use socio-economic characteristics to benchmark mortgage markets, we find a wide variation in over- and under-shooting of mortgage markets relative to their predicted levels, not just across countries but also within countries. This variation is not necessarily associated with income level, but does vary with certain policy areas. This benchmarking exercise can also shows the development of bubbles, with countries such as Ireland and Spain clearly showing an overheating in the mortgage market in the years leading up to the crisis (Figure 2).
Figure 2: Actual and predicted mortgage depth in Ireland over time
This paper is only a very first step in the exploration of cross-country variation in mortgage markets. There are several venues for further research. First, future data collection work should focus on additional important dimensions of the mortgage market, including maturity structure, loan-to-value ratios, range of financing products, loan currency and structure of mortgage providers. Similarly, contrasting different funding mechanisms with more detailed data will be important. Related to this, information on regulatory and taxation policies related to mortgage markets would be useful, including the deductibility of interest payment, legal or regulatory limits on loan-value ratios or other contract terms, stamp duties or taxes and other rules. Second, a more in-depth exploration of policies that can foster mortgage market development is warranted. This implies collection of more detailed data on specific policies affecting the development of mortgage markets, but also exploiting specific policy changes to address the identification challenge.