Friday 19 March 2021 13:00 - 14:30

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About this event

We study the impact of the likelihood that a house is repossessed – conditional on the mortgage being in arrears and taken to court – on mortgage and housing demand. We focus on the severity of courts that adjudicate on repossession cases in England and Wales. We develop a simple theoretical framework which shows that the effect of increasing repossession risk on house prices and mortgage sizes can be positive if courts are too lenient to begin with – but negative if they are too strict. Our analysis also suggests that, when courts are too strict, severity does not affect the number of repossessions in a recession. To test the predictions of our model, we exploit exogenous spatial variation in repossession risk created by boundaries of courts’ catchment areas. We find that the impact of court severity is negative on both mortgage and housing demand: for a one standard deviation increase in court severity, housing demand decreases by 4.6%. This effect remains fairly stable in booms and recessions. This pattern suggests courts in our sample are too strict – and demonstrates a new source of friction in credit and housing markets.

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Directions

Urban and Regional Economics Seminars are part of the CEP's Urban and spatial programme.