Essays on mortgage and housing markets
File(s)
Author(s)
Liu, Lu
Type
Thesis
Abstract
This thesis studies household behavior in housing and mortgage markets. The thesis uses micro-level data and structural models to highlight novel features of the choice environment and trade-offs that households face when they make high-stakes financial decisions in these markets. The thesis consists of three chapters.
In the first chapter, I show that the choice of mortgage fixation length tracks the life-cycle dimension of credit risk in the mortgage market, where the loan-to-value (LTV) ratio declines over time. High-LTV borrowers face a trade-off between their demand to insure against repricing, and obtaining a lower credit spread over time using shorter-term contracts. To quantify demand for longer-term contracts, I develop a life-cycle model of optimal mortgage fixation choice. With baseline house price growth and interest rate risk, high-LTV households prefer shorter-term contracts, in line with the data.
In the second chapter, I use comprehensive data on issued and offered mortgages in the UK to document that lenders differ substantially in the fees they charge, and that borrowers appear less overall cost-sensitive to products with fees. I show that lenders pass on firm-specific funding cost shocks via fees, but not interest rates, consistent with strategic pricing of fees, and maintaining competitive prices in the salient price dimension, interest rates.
The third chapter quantifies reference dependence and loss aversion in the housing market using rich Danish administrative data. The structural model matches key nonparametric moments, including a ``hockey stick" in listing prices with nominal gains, and bunching at zero realized nominal gains. Households derive substantial utility from gains over the original house purchase price; losses affect households roughly 2.5 times more than gains. The model helps explain the positive correlation between aggregate house prices and turnover, but cannot explain visible attenuation in reference dependence when households are more financially constrained.
In the first chapter, I show that the choice of mortgage fixation length tracks the life-cycle dimension of credit risk in the mortgage market, where the loan-to-value (LTV) ratio declines over time. High-LTV borrowers face a trade-off between their demand to insure against repricing, and obtaining a lower credit spread over time using shorter-term contracts. To quantify demand for longer-term contracts, I develop a life-cycle model of optimal mortgage fixation choice. With baseline house price growth and interest rate risk, high-LTV households prefer shorter-term contracts, in line with the data.
In the second chapter, I use comprehensive data on issued and offered mortgages in the UK to document that lenders differ substantially in the fees they charge, and that borrowers appear less overall cost-sensitive to products with fees. I show that lenders pass on firm-specific funding cost shocks via fees, but not interest rates, consistent with strategic pricing of fees, and maintaining competitive prices in the salient price dimension, interest rates.
The third chapter quantifies reference dependence and loss aversion in the housing market using rich Danish administrative data. The structural model matches key nonparametric moments, including a ``hockey stick" in listing prices with nominal gains, and bunching at zero realized nominal gains. Households derive substantial utility from gains over the original house purchase price; losses affect households roughly 2.5 times more than gains. The model helps explain the positive correlation between aggregate house prices and turnover, but cannot explain visible attenuation in reference dependence when households are more financially constrained.
Version
Open Access
Date Issued
2022-09-29
Date Awarded
01/02/2023
Advisor
Ramadorai, Tarun
Kacperczyk, Marcin
Sponsor
Imperial CollegeLondon
Engineering and Physical Sciences Research Council
Publisher Department
Business School
Publisher Institution
Imperial College London
Qualification Level
Doctoral
Qualification Name
Doctor of Philosophy (PhD)
Rights Embargo Date
31/01/2025