Aim of Paper: Which factors affect the choice of interest rates?

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Factors behind interest rate decisions among apartment buyers in Stockholm

Maria Hullgren, Institute of Technology, Stockholm

Aim of Paper:• Which factors affect the choice of interest rates? • Investigate whether the results from previous

international research also apply to Swedish conditions and whether there are additional factors of influence which are significant.

• See whether different types of Swedish households choose different interest rate lock-in periods.

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Background to survey; Price changes(Data from Mäklarstatistik)

1/1/2004, prices in SEK

1/7/2008, prices in SEK

Detached houses; Sweden

Approx. SEK 1.3 m. Approx. SEK 1.9 m. (+46%)

Detached houses; Stockholm County

Approx. SEK 2.6 m. Approx. SEK 3.6 m. (+38%)

Condominium; (bostadsrätt) Sweden

Approx. SEK 12,500 /sq.m.

Approx. SEK 18,000/sq.m. (+44%)

Condominium; (bostadsrätt) Stockholm County

Approx. SEK 18,000/sq.m.

Approx. SEK 32,500/sq.m. (+80%)

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Indebtedness of households 2004-2008

2004Total loans of households=SEK 1,400 billion. Of these, about 75 per cent, or SEK 1,050 billion, was security in the form of small houses.

2008Total loans of households=SEK 2,125 billion. Of these, about 80 per cent, or SEK 1,7 billion, was security in the form of small houses.

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Mortgage rate changes & implications for households• Change in the type of home loan lock-in period that

households have chosen. In 2004, 54 per cent of new lending took place at adjustable interest rates. In 2008 this share had risen to 62 per cent.

• During the period 2004-2008, home loan interest rates have fluctuated substantially in Sweden:adjustable/three-month rates have been at a minimum of 2.44 per cent (2005) and a maximum of 6.40 per cent (October 2008).

Households may have become more sensitiveto changes in the interest rate position and thesituation in the real estate market.

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Earlier findings:Children Age Mover Income Price

Baesel & Biger (1980)

X X

Statman,(1982)

X

Dhillon, Shil-ling & Sir-mans (1987

X X X

Smith (1987) X X

Brueckner & Follain (1988)

X X X

Brueckner (1992)

X

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Earlier findings, cont:Children Age Mover Income Price

Sa-Aadu & Megbolugbe(1995)

X X X

Sa-Aadu & Sirmans (1995)

X X X

Campbell & Coco (2003)

X (X) X

Paiella & Pozzolo, 2007

X X X X

Coulibaly & Li (2007)

X X

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Survey, spring 2008: Data

• Criteria: Have purchased an apartment; not a detached or terraced house.

• Have taken out a loan in connection with the purchase.

• And that the apartment should be located in the centre of Stockholm.

• Interviews: 30 households• In person or by telephone within a fortnite

from taking possession of property.• Duration: 20-30 minutes

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Survey questions

• Purchase price• Cash down payment and loan portion respectively• How much fixed – adjustable rate?• How did you come to a decision about which to

choose?• What factors haves had an influence? • Previous experience of home purchase and

choice of interest • How long do you plan to live in the new home?• Monthly fee• Gross income of the household • Amortization• Age• Number of children in the household

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Basic data about the interviewees:

Lowest/highestvalue

Average value

Median

Age (years) 25-57 34.5 32.5

Income per household(SEK)

264.000-1.500.000

692.400 660.000

Loan amount/Annual income

2.55-8.10 4.51 4.48

Loan amount/Price

0.13-1.0 0.69 0.76

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Basic data; contin.First-time buyers

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Families with children

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‘Movers’ 2

Single-person households

9

First-time buyers

5

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Findings:Chi square value

Significance 5 % level

Significance1 % level

Media 7.45 Yes Yes

Income 3.70 No No

Interest difference

1.77 No No

Family & friends

1.77 No No

Bank staff member

1.64 No No

Average age of household

1.20 No No

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Findings:

Chi square value

Significance 5 % level

Significance1 % level

Specialist knowledge

1.20 No No

Children in household

1.20 No No

Household composition

0.11 No No

Loan/income 0.04 No No

Loan/price 0.01 No No