Mortgage Innovation and House Price Booms

Abstract

We study the genesis of the 2000s housing boom in Denmark, a country with a similar mortgage-finance system to the U.S., but with strictly enforced recourse borrowing and a robust regulatory mortgage lending framework that limits housing speculation. The rapid legalization of interest-only (IO) mortgages ignited the boom. Due to their introduction, house prices increased 36 percent, with larger impacts in areas with greater ex-ante benefits of such mortgages. These results are congruent with IO mortgages easing debt-service burdens in a wide-scale credit supply expansion, which in turn fueled house price expectations and the further use of alternative mortgage products.