title: What makes mortgage finance markets work? An inquiry into residential mortgage finance development in developing economies
Creators: name: Donkor-Hyiaman, Kenneth Appiah
Publisher: name: University of Reading
Year: 2018

description: Housing costs typically constitute more than the annual income of potential homeowners both in developed and developing countries. The capital-intensive nature of housing investments, therefore, make some form of consumption smoothening necessary for homeownership to become affordable to many people. Mortgage finance development therefore contributes to economic growth and development. Despite its relevance, well-functioning mortgage finance systems have hardly emerged or are underdeveloped in most developing economies. The underdevelopment of mortgage markets is a characteristic that is not limited only to developing countries but also to some rich countries. This field has therefore excited academic interest, but gaps remain in the comparative analysis of the organisation, structure and performance of mortgage markets in developing economies. This research attempts to fill some of those gaps. Using a multi-method research approach, implemented in three papers, this thesis investigates the extent to which markets enable mortgage finance and the reasons for wide variations in mortgage finance. Across 116 developing economies, we found that mortgage finance markets are more likely to deepen in highly urbanised countries. These countries are characterised by higher income levels (middle-income threshold and upwards); macroeconomic stability, large economically active population who have better access to the financial system and long-term lenders. These are lenders who can allocate mortgage credit relatively efficiently through public credit registers and whose rights are well protected by stronger institutional and regulatory frameworks. Other factors emerging from the case studies include having cultures that favour mortgage (debt) financing; land administration efficiencies; and efficient urban management and governance systems that foster the adequate supply of quality affordable housing in well-planned locations that benefit from the effective enforcement of development controls. Further, improving financial literacy levels and financial innovation may contribute to mortgage finance development. The findings also indicate that stronger creditor property rights are associated with economies that are characterized by political stability, higher corruption control, effective governments, higher income levels, and judicial independence. It is argued here that these favourable factors are also not necessarily products of legal heritage, culture and geography as is assumed by existing theories of financial development. The political economies and political ideologies of developing economies play key roles in determining the quality of their mortgage institutional settings and the existence of these favourable conditions with ramifications for mortgage finance development. The results have policy implications, some of which are briefly outlined here: 1. Financial inclusion (access) is leading indicator of financial and mortgage deepening; 2. There is a need for macroeconomic strengthening to improve affordability and demand for mortgage finance; 3. Economic and financial liberalisation promote mortgage deepening and financial development. The achievement of this outcome requires the development of economic institutions and infrastructure such as credit information sharing systems and appropriate legal systems. Poor legal fundamentals, in particular, the inability to create and enforce a mortgage lien in a reasonably efficient and cost-effective manner and high credit information asymmetry leads to increased risk of mortgage lending, higher transactions costs and markets that are both smaller and shallower regarding income strata served and the total size of investments; 4. Financial literacy and mortgage education is likely to make a significant contribution. There is, therefore, a need to instil mortgage financing as a culture deliberately; 5. Housing and urban planning policies to supply quality affordable housing in well-planned communities mostly those around central business districts are also vital. Mortgage financing could help in improving urban planning and the enforcement of development controls; 6. The digitisation of land title registers coupled with efficient access by creditors at lower cost must be prioritised if land registration is to have a significant effect on mortgage finance development; 7. Mortgage finance and finance general in developing countries benefits from a demographic dividend. Governments in developing countries (especially African countries) must take advantage of their large, youthful, and economically active population to put in the right policies and systems to develop mortgage finance.