Claes Bäckman, University of Lund
"Financial Innovation, House Prices and Consumption"
We use detailed household-level data and a mortgage market reform in Denmark to show how an increasing share of interest-only mortgages can create a strong link between house prices and consumption. Consumption expenditure and house price growth are uncorrelated prior to the introduction of interest-only mortgages in 2003. As interest-only mortgages grow towards half of outstanding mortgages, house price, consumption expenditure and home equity borrowing expand rapidly in areas where these new products were more popular. Our results are consistent with nancial innovation causing both house prices and consumption to increase.