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Price-setting and Price Dispersion in the Dutch Mortgage Market

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  • W.H.J. Hassink
  • M. van Leuvensteijn

Abstract

We analyse empirically price-setting in the Dutch mortgage market, using information on about 124,000 Dutch households and 54 mortgage lenders over the years 1996-2001. For a narrowly defined set of mortgages (which have a fixed lending rate for ten years), the range of the lending rate between lenders varies between 0.86 and 1.24 percentage points over these years. Prices remain dispersed across lenders, even after controlling for the characteristics of the household and the municipality (1 percentage point). We find that the price dispersion of mortgages sold by banks is smaller than that of mortgages sold by life insurers (0.60 versus 1.28 percentage points). This difference may be due to lower agency costs for banks than for life insurers. Another likely explanation is that the market segment for banks is more transparent than that of insurance companies. This may imply that there is imperfect competition among lenders, so that some of them can develop market power. Furthermore, we find indications for market power since lenders with higher costs have higher lending rates, accounting for a maximum change of the lending rate by 0.076 – 0.16 percentage point.

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Bibliographic Info

Paper provided by Utrecht School of Economics in its series Working Papers with number 03-07.

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Date of creation: 2003
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Handle: RePEc:use:tkiwps:0307

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Keywords: Mortgage market; Price dispersion; Agency costs; Search costs; Lender-borrower matched data;

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  1. Angrist, Joshua D & Krueger, Alan B, 1991. "Does Compulsory School Attendance Affect Schooling and Earnings?," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 979-1014, November.
  2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  3. Toolsema, Linda A., 2002. "Competition in the Dutch consumer credit market," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2215-2229, November.
  4. Nothaft, Frank E. & Perry, Vanessa G., 2002. "Do mortgage rates vary by neighborhood? Implications for loan pricing and redlining," Journal of Housing Economics, Elsevier, vol. 11(3), pages 244-265, September.
  5. Fase, M. M. G., 1995. "The demand for commercial bank loans and the lending rate," European Economic Review, Elsevier, vol. 39(1), pages 99-115, January.
  6. Leonard Laudadio, 1987. "Commercial Banks: Market Structure and Short-Term Interest Rates," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 9(4), pages 632-641, July.
  7. Gary-Bobo, Robert J. & Larribeau, Sophie, 2002. "A Structural Econometric Model of Price Discrimination in the Mortgage Lending Industry," CEPR Discussion Papers 3302, C.E.P.R. Discussion Papers.
  8. Harry E. Merriken, 1988. "Mortgage Loan Market Segmentation and Lender Pricing Behavior," Journal of Real Estate Research, American Real Estate Society, vol. 3(1), pages 9-18.
  9. Toolsema, Linda A. & Jacobs, Jan, 2001. "Why do prices rise faster than they fall? : with an application to mortgage rates," CCSO Working Papers 200106, University of Groningen, CCSO Centre for Economic Research.
  10. Reint Gropp & John Karl Scholz & Michelle White, 1996. "Personal Bankruptcy and Credit Supply and Demand," NBER Working Papers 5653, National Bureau of Economic Research, Inc.
  11. Chiang, Raymond C & Chow, Ying-Foon & Liu, Ming, 2002. "Residential Mortgage Lending and Borrower Risk: The Relationship between Mortgage Spreads and Individual Characteristics," The Journal of Real Estate Finance and Economics, Springer, vol. 25(1), pages 5-32, July.
  12. Duca, John V & Rosenthal, Stuart S, 1994. "Do Mortgage Rates Vary Based on Household Default Characteristics? Evidence on Rate Sorting and Credit Rationing," The Journal of Real Estate Finance and Economics, Springer, vol. 8(2), pages 99-113, March.
  13. Richard L. Haney, Jr., 1988. "Sticky Mortgage Rates: Some Empirical Evidence," Journal of Real Estate Research, American Real Estate Society, vol. 3(1), pages 61-73.
  14. Steven Salop & Joseph Stiglitz, 1977. "Bargains and ripoffs: a model of monopolistically competitive price dispersion," Special Studies Papers 94, Board of Governors of the Federal Reserve System (U.S.).
  15. Crawford, Gordon W & Rosenblatt, Eric, 1999. "Differences in the Cost of Mortgage Credit Implications for Discrimination," The Journal of Real Estate Finance and Economics, Springer, vol. 19(2), pages 147-59, September.
  16. de Bondt, Gabe, 2002. "Retail bank interest rate pass-through: new evidence at the euro area level," Working Paper Series 0136, European Central Bank.
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Cited by:
  1. Linda A. Toolsema & Jan P. A. M. Jacobs, 2007. "Why do prices rise faster than they fall? With an application to mortgage rates," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 701-712.
  2. Leo Haan & Elmer Sterken, 2011. "Bank-Specific Daily Interest Rate Adjustment in the Dutch Mortgage Market," Journal of Financial Services Research, Springer, vol. 39(3), pages 145-159, June.
  3. Leo de Haan & Elmer Sterken, 2006. "Price Leadership in the Dutch Mortgage Market," DNB Working Papers 102, Netherlands Central Bank, Research Department.

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