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The efficiency of savings-linked relationship lending for housing finance

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  • Kirsch, Steffen
  • Burghof, Hans-Peter

Abstract

We characterize Contractual Saving for Housing (CSH), a widespread and important product of household housing finance in Continental Europe, as relationship lending that is based on information production about borrowers in preceding saving relationships. In a multi-period partial equilibrium model of lending to households, we compare such savings-linked relationship lending with arm’s-length lending. Our model shows that savings-linked relationship lending leads to a Pareto improvement or an increase in the allocative efficiency of the financing market compared to arm’s-length lending in markets of low time preference or low average borrower quality. In these markets, savings-linked relationship lending can overcome financing market failure due to adverse selection, which is especially true for financing volumes that are large in comparison to households’ incomes. Hence, savings-linked relationship lending can in particular support housing purchases of low-income households and is able to increase home ownership rates. Our work provides, to our knowledge, the first theoretical relationship lending explanation for CSH. Further, our results add a novel economic explanation for synergies between the two main activities of traditional commercial banking, deposit-taking and lending.

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  • Kirsch, Steffen & Burghof, Hans-Peter, 2018. "The efficiency of savings-linked relationship lending for housing finance," Journal of Housing Economics, Elsevier, vol. 42(C), pages 55-68.
    • Handle: RePEc:eee:jhouse:v:42:y:2018:i:c:p:55-68
    DOI: 10.1016/j.jhe.2018.05.003
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    Cited by:

    1. Julia Braun & Hans-Peter Burghof & Julius Langer & Dag Einar Sommervoll, 2024. "The Volatility of Housing Prices: Do Different Types of Financial Intermediaries Affect Housing Market Cycles Differently?," The Journal of Real Estate Finance and Economics, Springer, vol. 69(3), pages 377-408, October.
    2. Cheshire, Paul C. & Hilber, Christian A. L., 2018. "Housing in Europe: a different continent - a continent of differences," LSE Research Online Documents on Economics 90645, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Relationship lending; Information production; Housing finance; Contractual Saving for Housing;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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