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Higher mortgage interest deductions lead to higher house prices, higher debts and more mortgage defaults

29 June 2018

Higher mortgage interest deductions lead to higher house prices, higher debts and more mortgage defaults. That is the conclusion of PhD student Cenkhan Sahin from his research into the macroeconomic effects of mortgage interest deduction. High mortgage interest deductions also lead to a greater drop in consumer spending in the event of financial shocks. Furthermore, if the mortgage risk is high, the presence of mortgage interest deduction leads to greater fluctuations during external financial shocks. Sahin thus provides empirical and theoretical evidence for the idea that mortgage interest deduction is a relevant factor in preventing mortgage defaults.

Sahin’s doctoral thesis contains four studies into the importance of macroeconomic and financial stability and the role of policy. He researched questions that arose in the aftermath of the recent financial crisis, which is considered to be one of the worst in modern economic history.


Sahin concludes that it is important to look at the housing market in light of the macroprudential policy of De Nederlandsche Bank, the supervisory authority that focuses on the solidity of the financial system as a whole. Policy that aims to support individual home owners by providing mortgage interest deductions can be dangerous from the perspective of macroeconomic stability. In contrast, policy that aims to calm markets by providing more information and transparency can help promote financial stability. Stress tests enable the supervisory authority to achieve this.

Stress tests

Together with Ekaterina Neretina (a PhD student at Tilburg University) and UG professor Jakob de Haan, Sahin quantified market reactions to the American stress tests that were carried out after the financial crisis. He concludes that the tests provided valuable information for the markets, and can thus help increase transparency in banking. They also appear to be a useful tool for mitigating systematic and systemic risk in stock and credit markets.

Sahin and De Haan studied the reactions of the financial markets to the ECB’s Comprehensive Assessment. He concludes that publishing information about the stress test only influenced the markets to a certain extent. The limited market response can be interpreted in two ways: the financial markets did not trust the assessment and thus decided to ignore the results; or, more plausibly, the results of the assessment were in line with market expectations.

Government-owned banks’ performance is below average

Sahin also researched non-listed banks during a period of exuberance on the financial markets, and evaluated the performance of government-owned banks. He shows that many banks are government-owned, and that these banks’ performance is below average. He also shows that the risk is greater if a bank is government-owned. It appears to be inefficient and a greater risk for governments to own banks, even in times of excessive credit growth.

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Last modified:28 May 2021 11.41 a.m.
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