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Why has the mortgage debt increased by so much in Canada?

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  • Mario Fortin

    (Departement d'economique and GREDI, Faculte d'administration, Universite de Sherbrooke)

Abstract

This paper estimates a reduced form model of the Canadian mortgage demand from 1971 to 2010. Three equations are estimated, one for the average real value of new mortgage loans originated, another one for the number of new loans and a third for the flow of real repayment of existing loans. The results show that the nominal interest rate is the main source of change in the number of new loans while real housing price is the main determinant of the value of new loans. Two other variables, the real per-capita disposable income and the inflation rate, are also significant in changing the flow of new loans originated. A fall in the inflation rate accompanied by a concomitant reduction in the interest rate is in average the main source of increase in households' mortgage debt, because it increase the flow of new loans and at the same time reduces the rate of repayment of existing loans. Between 2000 and 2007, the unprecedented increase in real housing price while inflation was stable became the main factor behind the rise in mortgage debt, mostly because the average mortgage debt increased significantly. After that, the reduction in the interest rate sustained an increase in the number of new loans. The model does not find indications that a change in the supply side of the mortgage market played a significant role in the increased level of mortgage debt.

Suggested Citation

  • Mario Fortin, 2015. "Why has the mortgage debt increased by so much in Canada?," Cahiers de recherche 15-03, Departement d'économique de l'École de gestion à l'Université de Sherbrooke.
    • Handle: RePEc:shr:wpaper:15-03
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    File URL: http://gredi.recherche.usherbrooke.ca/wpapers/GREDI-1503.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Mortgage market; household debt; Canada;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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