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A Dynamic Analysis of Mortgage Arrears in the UK Housing Market

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Author Info

  • Catarina Figueira

    (Cranfield University)

  • John Glen

    (Cranfield University)

  • Joseph Nellis

    (Cranfield University)

Abstract

The UK economy has enjoyed an unprecedented period of positive economic growth since the early 1990s. The absence of recession for more than a decade has been accompanied by a sustained decline in the level of mortgage arrears, as reported by major lenders. This paper seeks to examine the factors which have driven the reduction in mortgage arrears and, in doing so, identify those factors which are most likely to cause arrears to increase in the future, should economic conditions deteriorate. The paper employs the Johansen methodology to test for the presence of multiple cointegrating vectors. An error correction model is estimated in order to examine long-run and short-run dynamics in mortgage arrears. In line with previous research concerning the causes of mortgage arrears, the results presented here emphasise the importance of changes in the rate of unemployment, loan–income and debt–service ratios. More importantly, our results highlight the statistical significance of unwithdrawn housing equity as an explanatory variable with respect to mortgage arrears.

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File URL: http://128.118.178.162/eps/urb/papers/0509/0509006.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Urban/Regional with number 0509006.

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Length: 16 pages
Date of creation: 07 Sep 2005
Date of revision:
Handle: RePEc:wpa:wuwpur:0509006

Note: Type of Document - pdf; pages: 16
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Web page: http://128.118.178.162

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Keywords: mortgage arrears; housing market; cointegration;

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References

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  1. Miles, David K, 1993. "House Prices, Personal Sector Wealth and Consumption: Some Conceptual and Empirical Issues," The Manchester School of Economic & Social Studies, University of Manchester, vol. 61(0), pages 35-59, Suppl..
  2. Brookes, Martin & Dicks, Mike & Pradhan, Mahmood, 1994. "An empirical model of mortgage arrears and repossessions," Economic Modelling, Elsevier, vol. 11(2), pages 134-144, April.
  3. Jeremy C. Stein, 1993. "Prices and Trading Volume in the Housing Market: A Model with Downpayment Effects," NBER Working Papers 4373, National Bureau of Economic Research, Inc.
  4. Robert J. Shiller & Karl E. Case & Allan N. Weiss, 1995. "Mortgage Default Risk and Real Estate Prices: The Use of Index-Based Futures and Options in Real Estate," Cowles Foundation Discussion Papers 1098, Cowles Foundation for Research in Economics, Yale University.
  5. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  6. Woodward, Susan E. & Weicher, John, 1989. "Goring the Wrong Ox: A Defense of the Mortgage Interest Deduction," National Tax Journal, National Tax Association, vol. 42(3), pages 301-13, September.
  7. Böheim, René & Taylor, Mark P, 2000. "Unemployment Duration and Exit States in Britain," CEPR Discussion Papers 2500, C.E.P.R. Discussion Papers.
  8. Devereux, Michael P. & Lanot, Gauthier, 2003. "Measuring tax incidence: an application to mortgage provision in the UK," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1747-1778, August.
  9. Patric H. Hendershott & Dr. Gwilyn Pryce & Dr. Michael White, 2002. "Household Leverage and the Deductibility of Home Mortgage Interest: Evidence from UK House Purchasers," NBER Working Papers 9207, National Bureau of Economic Research, Inc.
  10. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, December.
  11. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  12. F J Breedon & M A S Joyce, 1993. "House prices, arrears and possessions: A three equation model for the UK," Bank of England working papers 14, Bank of England.
  13. Sven Rady, 1998. "Boom In, Bust Out: Young Households and the Housing Price Cycle," FMG Discussion Papers dp310, Financial Markets Group.
  14. Alex O. Williams & William Beranek & James Kenkel, 1974. "Default Risk in Urban Mortgages: A Pittsburgh Prototype Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 2(2), pages 101-112.
  15. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  16. Pain, Nigel & Westaway, Peter, 1997. "Modelling structural change in the UK housing market: A comparison of alternative house price models," Economic Modelling, Elsevier, vol. 14(4), pages 587-610, October.
  17. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  18. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  19. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
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Cited by:
  1. Martín Vallcorba & Javier Delgado, 2007. "Determinantes de la morosidad bancaria en una economía dolarizada. El caso uruguayo," Banco de Espa�a Working Papers 0722, Banco de Espa�a.
  2. Janine Aron & John Muellbauer, 2010. "Modelling and Forecasting UK Mortgage Arrears and Possessions," Economics Series Working Papers 499, University of Oxford, Department of Economics.
  3. Roberto Blanco & Ricardo Gimeno, 2012. "Determinants of default ratios in the segment of loans to households in Spain," Banco de Espa�a Working Papers 1210, Banco de Espa�a.
  4. Mitropoulos, Atanasios & Zaidi, Rida, 2009. "Relative indicators of default risk among UK residential mortgages," MPRA Paper 19619, University Library of Munich, Germany.

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