Mortgage choice behavior of private households in a dynamic market environment – Empirical evidence for Switzerland

Abstract

The purchase of a house or apartment and the related choice of a mortgage provider and product constitute a pivotal financial decision for many households. Accordingly, mortgage loans represent the largest proportion of household debts in most OECD countries and an important proportion of the retail banking business. Even though homeownership in Switzerland is with a homeownership rate of 40% remarkably low, the Swiss mortgage market is one of the largest in the world. This is related to the fact that homeowners can borrow up to 80% of the value of their property. Also, Swiss property prices are on average relatively high in comparison to other countries, and they have been dramatically increasing over the last years, rendering the acquisition of residential properties even more difficult. According to the Swiss National Bank, the outstanding volume of the domestic mortgage loans in Switzerland amounted to 1.07 billion Swiss francs by the end of 20201—accounting for almost 150% of the country’s nominal GDP—with 75% of bank credits concerning mortgage loans. In view of these circumstances, the mortgage market in Switzerland is very attractive and represents a major source of profit for mortgage loan providers. the otherwise traditionally conservative mortgage market in Switzerland is gradually manifesting certain dynamics. We observe the emergence of new players and products. Even though banks rank first as lenders for real estate purchases—accounting for 95% of the market—they are no longer the only option for Swiss households. Alternative providers, such as insurance companies, pension funds and crowdfunding platforms, have been steadily gaining ground in the market. New or revised market rules, along with further disruptions are anticipated in the housing and mortgage markets, given the technological advances, as well as the currently notably low interest rate environment—conditions that are expected to encourage further market penetration. The hitherto reserved role of mortgage brokers also seems to be changing, and an increasing number of households rely on corresponding service providers, whose offer clearly increases market transparency. Interestingly, we also observe differences in particular with respect to the role of mortgage brokers between the German- and French-speaking part of Switzerland. The language regions are related to existing cultural differences, which are also reflected in these financial choices. These facts lead to the conclusion that Switzerland is a very interesting market to study the mortgage choice behavior of private households. Main research questions, data and methodology How do households choose their mortgage supplier? How is this decision related to their creditworthiness and the value of their property? What sociodemographic characteristics of the households and geographic factors come into play? How does financial literacy and attitudes such as risk aversion affect mortgage decision-making? Which households get credit from their first-best mortgage provider, and which ones shop around? Given the nature of the credit allocation problem, that is characterized by asymmetric information, do we observe a selection process with potentially harmful consequences for the economy as a whole? Taking into consideration (i) the importance of mortgage decisions for the households, (ii) the high relevance of the mortgage business for retail banks in Switzerland, and (iii) the dynamic market environment with the new supply possibilities and the expected intensification of the competition among the mortgage providers, it is important to have a good understanding of the mortgage choice behavior of the borrowers. The purpose of our study is to understand the mortgage choice behavior of private households as function of the sociodemographic profile, their level of financial literacy and their degree of risk aversion. Our results will be based on a large-scale and unique online survey with 1’000 respondents from the German- and French-speaking part of Switzerland. We will use a regression framework to analyze the mortgage provider choice of private households in Switzerland. The expected results will provide new insights about the preferences of households with respect to the different mortgage providers as a function of household-specific, institutional and market-specific characteristics. The insights will not only be interesting from an academic point of view, but they are also addressed to practitioners who are able to better understand the changing market environment in order to optimize their mortgage offer. Finally, the regulatory authorities, which are keeping a close eye on the mortgage market, especially nowadays with the existing fears of inflation, will be able to draw interesting conclusions from the results.