Relationships Between the Mortgage Instrument, the Demand for Housing and Mortgage Credit: A Review of empirical Studies and Discussions

The examples given in the introduction to this monograph provide persuasive arguments that the combination of inflation and the traditional mortgage instrument imposes burdens on households and thrift stitutions, burdens which are likely to have impacts in the housing market and ultimately on the construction sector. We are interested in whether or not the existing literature, summarizing empirical research, can provide evidence of these impacts and an understanding of how changes in the mortgage instrument would affect the demand for housing and the demand for mortgage credit. Unfortunately, for such a survey the mortgage instrument is multidimensional, with a variety of characteristics that influence housing finance. Among them are interest rates, amortization-period terms, down payment requirements, prepayment penalties and the resulting initial payment and time path of real and nominal payments. Our survey of the literature is structured to evaluate the evidence about the impact of these parameters of the mortgage instrument on the demand for housing and mortgage credit. Our discussion places a heavy emphasis on relatively recent econometric models of housing activity and the demand for mortgage credit.1