Mortgage markets in Emerging Economies: Challenges and Prospects

Access to long-term credit remains one of the major obstacles to solving the perennial housing problems in many emerging economies. These countries have been making serious attempts at developing their mortgage markets in recent times. There is a general consensus on the need for emerging economies to develop housing finance systems that ensure easy and affordable access to credit. The exact nature and the elements of such a system are still subject to debate. The development of the mortgage markets in developed economies has been largely attributed to the integration of their mortgage and capital markets as well as the adoption of some form of the secondary mortgage market. In the first instance, the integration of the mortgage market with the broader capital market allows the housing market to compete for funds as mortgages become a mainstream asset class for long-term investors. The institution of secondary mortgage market provides a direct mechanism through which funds are channelled to the housing market thereby removing or reducing the constraints on the supply of credit. This paper discusses the challenges that impede the institution and growth of formal housing finance systems across emerging economies. In particular, the paper examines whether the integration of the mortgage and capital markets is a sufficient step in developing mortgage markets in emerging economies. Should these countries institute some form of secondary mortgage market or will that be an unnecessary complication? The paper addresses these questions by examining the development of the South African mortgage market. Using co-integration and VAR techniques, I find that even though the South African mortgage market was integrated with the capital market prior to 2001, there still remained significant constraints on the supply of credit. However, the institution of the secondary mortgage market in 2001 led to a significant reduction in the constraints of supply of credit confirming the role that secondary mortgage markets play in channelling funds into the housing sector.