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Endogeneity in household mortgage choice

Author

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  • Dungey, Mardi
  • Doko Tchatoka, Firmin
  • Yanotti, María B.

Abstract

We show that failing to correct for both sample selection and endogeneity bias leads to an under-estimate of the importance of mortgage price in determining the mortgage product a household selects. With proprietary, loan-level data from a major Australian mortgage provider we study interest rate determination, loan size and mortgage product choice. The level of mortgage indebtedness varies with the value and characteristics of the property, while individual mortgage interest rates depend on borrower characteristics. Our results show that borrowers consider the initial interest rate and implicitly the loan amount they can access when choosing a mortgage product.

Suggested Citation

  • Dungey, Mardi & Doko Tchatoka, Firmin & Yanotti, María B., 2018. "Endogeneity in household mortgage choice," Economic Modelling, Elsevier, vol. 73(C), pages 30-44.
    • Handle: RePEc:eee:ecmode:v:73:y:2018:i:c:p:30-44
    DOI: 10.1016/j.econmod.2018.03.001
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    References listed on IDEAS

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    Cited by:

    1. Zhang, Dongyang & Guo, Rui, 2020. "The consumption response to household leverage in China: The role of investment at household level," International Review of Financial Analysis, Elsevier, vol. 71(C).
    2. Wright, Danika & Yanotti, María B., 2019. "Home advantage: The preference for local residential real estate investment," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    3. Dungey, Mardi & Doko Tchatoka, Firmin & Yanotti, María B., 2018. "Using multiple correspondence analysis for finance: A tool for assessing financial inclusion," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 212-222.
    4. Thi Mai Luong, 2020. "Selection Effects of Lender and Borrower Choices on Risk Measurement, Management and Prudential Regulation," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 3-2020, January-A.

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    More about this item

    Keywords

    Mortgages; Interest rate; Selection bias; Endogeneity; IV;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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