Conference Paper BHPS-2005 Conference: the 2005 British Household Panel Survey Research Conference, 30 June -2 July 2005, Colchester, UK
When is mortgage indebtedness a financial burden to British households? a dynamic probit approach
Since the mid-1990s the volume of secured lending to households has expanded
rapidly, both in absolute terms and in relation to household incomes. This paper
examines the determinants of households’ ability to service this stock of secured debt
using disaggregated data from the British Household Panel Survey. It estimates a
random effects probit model for the probability of households having mortgage
payment problems, allowing for state dependence and unobserved heterogeneity.
Evidence of true state dependence is found: past experience of payment problems
actually increases the probability that the household has difficulties servicing its
secured debt today. Policy measures should therefore seek to minimise inflows into
payment problems. At the household level, inflows into unemployment, interest
income gearing of 20% and above, high loan-to-value ratios and having unsecured
debt which is a heavy burden are all associated with a significantly higher probability
of mortgage payment problems. Saving regularly and having unsecured debt which is
not a problem are both associated with a significantly lower probability of mortgage
payment problems. The only non-household-specific variable to have a significant
effect is the level of mortgage interest rates, which increases the probability of
payment problems. An aggregate measure of debt at risk is calculated. This has fallen
between 1994 and 2002, as falls in the probability of mortgage payment problems
have more than offset increases in the stock of mortgage debt outstanding. It is found
that the decline in the probability of mortgage payment problems has been greatest
amongst the most highly indebted households.
Key words: Mortgage Debt; Dynamic Probit.
JEL classification: D14; C23, C35.