Household mortgage demand: a study of the UK, Australia and Japan

Households combine their personal savings and mortgage debt to finance their home purchases. In developed countries, mortgage debt is the largest debt on a household’s balance sheet and in these countries, the mortgage penetration rates are high. For the stability of the mortgage market and thereby the money market in an economy, it is important to understand households' mortgage demand decisions and riskiness of these borrowers. There are differences in mortgage systems among countries, which play an important role in determining the mortgage decisions that households make. These differences arise from the availability of types of mortgage instrument (adjustable versus fixed rate mortgages), length of fixed period for a fixed rate mortgage contracts, conditions of prepayment, tax treatment, lenders’ constraints related to repayment, loan to value ratio, foreclosure and personal bankruptcy laws etc. These differences impact borrowers' choice of mortgage contract and mortgage demand. This paper analyses the mortgage demand behaviour of households in the UK, Australia and Japan. Specific questions that have been asked relate to the factors that determine household mortgage demand, housing demand and loan to value ratio. Though the homeownership is a preferred tenure and the mortgages are 'recourse' loans, housing markets in these three countries operate in different mortgage market institutional structure. Results indicate that income elasticity of mortgage demand differ despite income elasticity of housing demand being similar. Mortgage institutions that pose constraints for borrowers also determine the extent of mortgage demand. Other factors such as demography, economic conditions have also played an important role in determining mortgage and housing demand.