Abstract
This study investigates the possibility of adverse selection in the U.K. mortgage market. Long‐ and short‐run equations for the supply and demand for building society net advances are estimated using the Johansen procedure and three‐stage least squares. We identify a long‐run backward‐bending mortgage supply curve with a bank‐optimal nominal mortgage rate of 11·86 per cent, and from the cointegrating vectors we are able to estimate good error‐correction representations of supply and demand using three‐stage least squares. We find that the adjustment of supply and demand towards their long‐run equilibrium values is fairly slow.
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