1. A comment on the procyclicality of mortgage lending Trond-A. Borgersen, Østfold University & Karl Robertsen, Agder University ERES 2009, Stockholm

2. Disposision 1. Motivation – The Norwegain case 2. Model – Regime shifts 3. Empirical analysis (short) – Results/regimes 4. Conclusions

3. Norwegian housing market Nominal- and real house prices 12-mth. growth in house prices

4. Households: Debt-to-income ratio Source: Kredittilsynet (2008)

5. Debt-to-income, home-loan survey Source: Kredittilsynet (2008)

6. Home-loan survey: mortgage market developments Share of home mortgage loans in various LTV categories Source: Kredittilsynet (2008)

7. Home-loan survey: mortgage market developments Loan periods for various LTV-ratios Source: Kredittilsynet (2008)

8. Focus of the paper Mortgage market developements: – Less weight given to debt-to-income and more weight given to collateral How are these developments in the mortgage market related to the house price cycle?

9. Assume.. Lenders are myopic, i.e. care only about next period expected return – Endogenous credit constraint governs lending Exogenous house price process (for now) Expectations are adaptive The alternative rate of return impacts on mortgage lending

10. The housing demand of credit constrained households Endogenous credit constraint Housing investments Financial savings Liquidity contraint

11. Housing demand.. Depend on: user cost (the inverse-) and households net worth

12. Regimes Regime 1: Modest house price growth That is: Condition for :

13. Regimes.. Regime 2: Strong house price growth That is Even so: It is possible that when

14. Empirical analysis LSTR-modell (logistisk smooth transition regression, allowing for regime shifts between house price growth and the alternative rate of return (the interest rate) National Accounts (1987k1 - 2008k3) Focus: The relationship between household debt, collateral and debt-to-income at the aggregate level

15. Data

16. Empirical model Model Transision Debt-to-income, relative to it’s average

17. Transision Regimes: Situation (1): Strong house price growth. Situation (2): Modest house price growth

18. Conclusions/Results LSTR-1 identifies two regimes for the relationship between the housing market and the mortgage market – Regimes shift is significant for the relationship between mortgage debt and debt-to-income: Modest house price growth, both debt-to-income and collateral impacts mortgage debt negatively Strong house price growth, mortgage debt increases in the debt-to-income ratio – Even in the period 2004Q1-2008Q3 where debt-to-income is above long-term average » Credit driven housing market bubble

19. Conclusions Potential regime shifts in mortgage market structures according to the house price cycle – due to endogenous credit constraints and adaptive expectations LTV-ratios 100 % when price growth is strong When are pro-cyclic effects likely? – weak internal guidelines for risk assesments and/or increased competition for mortgage market shares – adaptive expectations are allowed to govern both the demand for housing and the supply of mortgage financing Highlights the importance of strong internal guidelines for credit risk assessments,taking into account both collateral and debt-to-income