Estimating the Elasticity of Mortgage Demand:Mortgage Notches in the Netherlands
This paper exploits a quasi-experiment in the Dutch mortgage market – households bunch at certain loan-to-value ratio thresholds due to discrete jumps (‘notches’) in the mortgage interest rate schedule – to estimate the relation between the interest rate and mortgage demand. This is done using a novel empirical methodology called bunching analysis. The estimates indicate that an increase in the mortgage interest rate of 1 percentage point reduces average mortgage demand by 3.5 percent. Analysing specific banks yields semi-elasticities between 1.1 and 7.5. These figures might be valuable when assessing the effect that monetary policies and reductions in the mortgage interest deduction rate (hypotheekrenteaftrek) have on the size and composition of mortgage debt in the Netherlands.