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Mortgage innovation and house price booms

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  • Bäckman, Claes
  • Lutz, Chandler

Abstract

We study how mortgage innovation can cause a housing boom even within a robust regulatory framework and strictly enforced recourse borrowing. Specifically, we find that the 2003 introduction of interest-only (IO) mortgages in Denmark ignited a housing boom that increased house prices 36 percent. In line with IO loans lowering debt-service payments and relaxing payment-to-income constraints, results show higher IO loan uptake and house price growth in areas with greater ex-ante benefits of such mortgages. Overall, our results are relevant for the many countries where IO loans play a sizable role in mortgage finance.

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  • Bäckman, Claes & Lutz, Chandler, 2025. "Mortgage innovation and house price booms," Journal of Urban Economics, Elsevier, vol. 145(C).
    • Handle: RePEc:eee:juecon:v:145:y:2025:i:c:s0094119024000950
    DOI: 10.1016/j.jue.2024.103725
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    More about this item

    Keywords

    Interest only mortgages; Housing booms; Mortgage lending;
    All these keywords.

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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