The policy-driven boom and bust in the housing market: Evidence from Mongolia

This paper examines the effects of a mortgage interest rate subsidy on boom and bust in the housing market by exploiting the Housing Mortgage (HM) program implemented in Mongolia. Main results are (i) the recent housing boom occurred from 2012Q2 to 2014Q1, while the housing bust lasted four years, (ii) both house-specific factors and macroeconomic variables have a significant influence on the housing price dynamics, (iii) mortgage interest rate semi-elasticity and real household income elasticity for Mongolia are estimated as -3.0 and 1.4, respectively, and (iv) dynamic analysis of the estimated VECMs suggests that the policy intervention in the mortgage market (i.e., introducing an interest rate subsidy on mortgage loans for buying residential properties with below 80 square meters) has driven the recent housing boom in Mongolia.