The Feasibility of Estimating the Demand

for Residential Mortgage Credit in Poland

23

In the usual course of specification of various models of the demand for mortgage

credit, a theoretical model is presented, which then determines, along with available data

(and/or proxies for unobserved phenomena), the econometric approach to estimation.

However, a rather wide variety of specifications have been made.  This section comments

very briefly on some of the technical approaches to credit demand models, which will give

at least a flavor of the discussions carried on by the modelers.

Various experts note that a complete specification of the demand for mortgage

would be an extremely challenging task.  Ling and McGill state that  ideally the demand

for mortgage debt would be specified as one equation in a simultaneous system that also

would include a housing demand equation, an equation for nonhousing consumption,

nonhousing asset demand equations (stocks, bonds, etc.) as well as an equation to

explain the level of consumer debt. 

16

  Very similarly, Follain and Dunsky note that the

empirical specification should stem from a theoretical model in which the demand for

mortgage credit would be specified as a system of demand equations including the

demand for housing, the demand for nonhousing consumption, the demand for various

assets, and the demand for mortgage and other types of consumer debt.

17

In practice, however, this approach would be exceptionally challenging, both

statistically and with regard to the availability of the necessary data; consequently,

estimation of the  complete model  has not been fully carried out in practice.

Follain and Dunsky, for example, approach estimation on a much simpler basis,

concentrating only on the demand for mortgage credit.  Two approaches are utilized: (1)

a single equation (reduced form) for the demand for mortgage credit, where the critical

variables are the costs of equity financed housing investment, mortgage debt financed

housing investment, consumer credit, household income, and numerous variables

capturing household preferences (size, age, marital status, composition, and so forth); and

(2) a model (structural equations) in which the demand for mortgage credit depends, in

part, on the demand for housing.  Thus, in the second formulation, the demand for

mortgage debt equation includes the value of the house purchase (a separate reduced 

form equation for the value of the house is also specified, which includes the user cost of

owner occupied housing).  Ling uses a similar (simultaneous) approach to house value

and debt level.

Despite the attention given to both theory and estimation, however, there is still not

full agreement as to what is really happening in the credit decision and how the various

factors interact.  Ling notes that there is really not a very well developed theory of the

16

See Ling, David and Gary McGill,  Evidence on the Demand for Mortgage Debt by Owner Occupants, 

1997, p.7.

17

See Follain, James and Robert Dunsky,  The Demand for Mortgage Debt and the Income Tax,  1997.