Credit Constraints and the Demand for Mortgage Debt in the UK

The post financial crisis tightening of mortgage conditions and changes in mortgage market regulation are the focus of this paper, considering variation across both UK regions and household types. The methodological approach employs a double hurdle model. A truncated regression and its empirical specification seek to reflect the presence of credit constraints, accounting for significant changes in financial regulatory regime. The econometric focus of the paper is the second hurdle (the demand for mortgage debt) in the double hurdle model, and the impact of mortgage type on this hurdle. Models employ Understanding Society Survey (USS) Data, covering newly originated mortgages for the period 2001-2018. The paper finds that since 2008 the North of England, Yorkshire, East Midlands, Wales, and Northern Ireland experience issues with access to both variable and fixed rate mortgage funds, while Scotland and the West Midlands had limited access to fixed rate mortgage credits. First-time buyers continue to be constrained by mortgage credit funds. Furthermore, we consider lenders’ profitability motives, constraining the supply of fixed rate funds for liquidity constrained (low income) households. Policy implications of this research include awareness of potential asymmetric responses to changing lending conditions within the mortgage market across regions which may assist in designing improved financial regulatory measures and housing affordability programs.