The Economics of Housing Savings Plans
Housing Savings Plans (HSP) are contractual savings products in which a household is granted a mortgage at preferential terms (or option for such) in exchange for accumulating savings in the plan and in the institution offering it. As such, they represent a bundle of savings and borrowing financial services. While such plans are common in some countries, the reasons for their use have not been fully explored. In some cases, HSPs are used because financial markets and institutions have not reached sufficient levels of development to attract savings or raise capital for housing finance, and in other cases, tax and subsidy incentives may be at play. Here, we ask under which circumstances households and financial institutions will voluntarily contract to participate in HSPs even in advanced capital markets and in the absence of tax/subsidy incentives. We argue that the HSPs may be chosen by households because of their hedging qualities. We model HSPs and show how changes in variables affect the willingness of households to join the HSP and the characteristics of any HSP chosen.
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