Dynamics in the Italian Real Estate Market

A fixed interest-rate on their mortgages offers a homeowner long term certainty about the monthly mortgage payments. On the other hand, adjustable interest-rates are on average lower them fixed interest-rates. In short, certainty about monthly payments has a price. In Europe the period in which interest-rates are fixed varies between 1 month (and less) and 30 years. Besides individual attitudes of homeowners, are there significant differences between European countries. In the United Kingdom for instance, homeowners choose on average for an adjustable interest-rate, in the Netherlands people typically choose for a fixed interest-rate of some 10 years. The preference for a fixed-rate or adjustable interest-rate isnít much influenced by the nominal level of the mortgage interest-rate itself. Two questions can be raised. (1) What explains the difference between European countries and between homeowners within a country in their choice for a fixed interest-rate or not? Institutional differences and/or social-economic and psychological factors will play an important role. (2) Secondly, what strategy, i.e. his or her choice for a fixed interest rate, would be financially optimal for the homeowner and under which conditions? This paper will concentrate mainly on the second question, the case for the Netherlands will be point of departure. Using Markov Chain Monte Carlo-simulation we will answer what the better strategy for the homeowner is. Two models will be evaluated. Firstly the case in which the homeowner has to hang on to his choice for an adjustable or fixed interest-rate, for the lifetime of the mortgage (i.e. 30 years). Secondly a model will be presented in which the homeowner can change from adjustable to fixed interest-rates and visa versa, depending on the level of nominal interest-rates.