Competition and Interest Rates in the Dutch Mortgage Market: An Econometric Analysis Over 2004-2010

Abstract

Triggerd by evidence that the mortgage interest margins have risen since 2009, an econometric analysis is conducted to explain the interest rates in the Dutch mortgage market at the bank level over 2004-2010.Controlling for the influence of costs, risks and also for some regulatory measures, we find statistically significant evidence that the degree of competition in the Dutch mortgage market (measured by C3 or HHI) affected the level of the mortgage interest rates. An increase in market concentration equal to the size of its standards deviation over the period of analysis raised the mortgage interest rate by approximately 0.10 to 0.20 percentage points. The impact of costs as well as risks appears to be about twice as large as the impact of market concentration.In addition, we find a statistically significant negative relationship between the degree to which the state-supported banks act as price leaders, either through imposed regulation or at their own discretion, and the mortgage interest rate. The conclusions continue to hold if we use actual mortgage interest rates instead of window mortgage interest rates.