Housing Finance and the Transmission of Mortgage Spread Shocks

Sammanfattning: Credit market frictions, captured by mortgage spreads, are potentially an equally important driver behind mortgage rate innovations as monetary policy. Possibly a significant driver of business cycles. Yet, the effect of such shocks on the economy has barely received any attention in empirical research. By estimating a SVAR for 12 EU countries, I find that mortgage spread shocks have a significant effect on GDP, consumption, residential investment and house prices. The magnitude of their effects is comparable to a monetary policy shock. I also find that the transmission mechanism of such shocks is influenced by mortgage market characteristics. A high mortgage debt-to-GDP ratio and widespread use of mortgage equity withdrawal, compared to a lower ratio and less or no use, potentially imply a stronger response in house prices and residential investment of 0.5 and 1 percent respectively.