Income Risk and Mortgage Choice Among Japanese Households

Abstract

This paper empirically examines the relationship between income risk and mortgage instrument choice among Japanese households. Since theoretical predictions about the impact of income risks on mortgage choice are mixed, it is important to investigate empirically whether or not risky households borrow ARM loans. In order to answer this question, we construct several measures of income variability and unemployment risk that capture the income risk of the specific household. Our empirical result suggests that these income risk measures are in general negatively associated with the choice of fixed-rate mortgage contract, indicating that risky borrowers are more likely to choose adjustable-rate mortgages. Furthermore, we also find that the impact of income risk on the mortgage choice depends critically on the individual risk preferences. While there is significantly negative impact of income variability and unemployment risk on the mortgage choice for the risk averse borrowers, no systematic relationship can be found for borrowers with low risk aversion.