The nature of credit rationing in the United Kingdom mortgage market

Abstract

This paper addresses the problem of how to estimate market demand functions for finance in the presence of rationing within the context of the U.K. house mortgage market. Two distinct approaches are outlined. The first, and more traditional, focuses on American studies in which non-price terms are assumed to adjust so as, in combination with price, to produce market clearing. In contrast, the approach used in the present study conjectures that non-interest-rate terms are varied so as to discriminate among borrowers, satisfying some but leaving the market uncleared. Empirical tests, using U.K. data, offer some support for this alternative approach. The paper offers some thoughts on credit rationing, and outlines possible avenues for further research into this important and current topic.