An econometric analysis of mortgage choices in the United Kingdom.
This study specifies and estimates qualitative dependent variable and truncated variable
models of mortgage demand using Family Expenditure Survey Data for 1986. The focus
of the research is the better understanding of mortgage choices under conditions of
rationing and subsequent to the financial deregulation of mortgage markets. Mortgage
choices involve the decision to incur mortgage debt, the size of that debt and the choice
of mortgage instrument. The links between these various mortgage choices, through the
user cost of owner occupation, are also explored.
The econometric methodology allows for the presence of rationing in the estimation of
the discrete choice of entering owner occupation with mortgage debt and choosing its
size. A double hurdle model of mortgage demand is specified and tested and compared
with a Tobit where zero observations are assumed to reflect equilibrium rather than
rationed decisions. The modelling is extended by estimating a model of the choice of
mortgage instrument. This is done with a bivariate probit with sample selection. The
empirical specifications are motivated by life cycle theory.
The results indicate that rationing had an influence upon the discrete and continuous
dimensions of mortgage choice. The double hurdle model appears a more appropriate
specification than the Tobit. The choice of mortgage instrument also appears to be
influenced by the presence of liquidity constraints and a concern for cash flow.