Mortgage Debt, Social Customs,and Financial Innovation

Although housing can be a powerful channel of monetary policy transmission this channel can be weakened by social customs and financial liberalization as well as accompanying innovation that create alternatives to bank mortgages controlled by a central bank. This paper utilizes some unique questions in the 1999 and 2002 Cyprus Surveys of Consumer Finances, as well as data from the 1998 and 2001 US Surveys of Consumer Finances, in order to study the role of social customs (in the form of parental housing gifts) and financial liberalization for the incidence of homeownership rates, mortgage debt and borrowing constraints. Unlike existing studies of financially developed countries, the data from the Cyprus Surveys suggest that only a very small proportion of Cypriot households are credit constrained and that a number of important economic characteristics of the household are irrelevant for homeownership and for the use of mortgages. Our findings suggest that the presence of such customs may interfere with the monetary transmission mechanism by limiting the sensitivity of housing investment to changes in credit market conditions. Financial liberalization leading to innovation could work in the opposite direction if it leads to increased household participation in formal loans controlled by the central bank.