Evidences of maturity mismatching of loans in OECD housing markets between 1995 and 2008

Abstract

The article focuses on maturity mismatching of loans in OECD economies during the last housing boom (which ended with the subprime mortgage crisis in 2007). Our model gives rise to an indicator measuring how strong the incentives for speculation were. The indicator is also used to estimate the influence of transaction costs and demand-side subsidies on leverage. According to the model, the influence of subsidies is likely to be limited compared to transaction costs, which may play a significant role in containing incentives for maturity mismatching. Some distinctive patterns can be deduced from a country by country analysis.

Keywords:

• housing
• maturity mismatching of loans
• leverage
• loans
• speculation
• OECD

JEL Classification:

• F01
• O50
• L74

Acknowledgements

The author would like to thank Giuseppe Nicoletti, Åsa Johansson, Dan Andrews, Aida Caldera, Christophe André and other OECD colleagues for helpful comments and suggestions. The views expressed in this article are those of the author and do not necessarily reflect those of the OECD or of the Bank of France.

Notes

¹ The slope of NR_t is positive, since P₀ + TC > F₁ (otherwise subsidies would be higher than the house price, which is absolutely unlikely). The slope of LR_t is also positive, since K₀ + TC + R_t + FC_t − F_t > 0 (recall that LTV < 1, c > 0 and also that the subsidies are lower than own funds).

² NR_t = –1 if and only if P_t = 0; NR_t = 0 if and only if P_t = P₀+ TC − F₁.

³ The proof is immediate, since the denominator of LR_t in Equation 10 corresponds with own funds and by construction these increase over time. LR_t = 0 if and only if P_t = P₀ + TC + FC_t − F_t, which increases over time because the cumulated financial costs, net of subsidies, increase as the loan progresses.

⁴ Recall that M₀ = LTV ∙ P₀ (Equation 3) and R_T = M₀; so P₀ +TC – F₁> K₀ + TC + R₁+ FC₁–F₁ if and only if M₀ > R₁+ FC₁, which is verified by construction (it means that loan if higher than the first repayment).

⁵ The number of leveraged investments that could be financed with a capital P₀ correspond to n = P₀/[P₀ (1−LTV)].

⁶ Recall that P₀ = M₀+ K₀ (Equation 2) and TC = c × P₀ (Equation 4).