Why Mortgage Depth And Penetration Are Higher In Wealthier Countries

Mortgage depth and penetration are higher in developed countries as these are more developed in prosperous countries. When the mortgage finance system is not well-developed, not many people will have access to home loans. And, the cost of a home loan is likely to be higher, too. In India, for example, even though capital appreciation of real estate assets is reasonably high, interest rates are high, too. This is partly because of high inflation, and partly because of an undeveloped banking and financial system.

India is not an exception. In poor countries like Nigeria, interest rates are much high, because inflation is very high. The United States has seen historically low inflation levels for the past three decades, and many other first world countries have done comparably well. This is because inflation targeting became the overriding motive of monetary policy in western capitalist democracies decades ago.  The US was late to adopt formal inflation targeting, but there has been an informal inflation target for nearly three decades. So, interest rates in countries like India and Nigeria tend to be many times higher than that of interest rates developed countries like France, Germany, and the US. So, mortgage depth and penetration are much higher in developed countries partly because the cost of borrowing is low.

This is not the only reason. To begin with, banks and financial institutions charge higher interest rates in the case of low-income households in developing countries. There are many reasons why this is so. In low-income countries, it is not easy to find out whether you are credit-worthy or not. This is because the tools and techniques to assess credit-worthiness are not yet well-developed. Moreover, when income levels are low, the cost of housing is likely to be much higher relative to income levels. So, banks are taking on a risk which is much greater. It is not just incomes which are lower. Income stability is also lower in developing countries. People are more likely to be employed intermittently. So, banks do not have much of an incentive to lend to them, except when they are willing to pay a significantly higher risk premium. This does not apply as much in the case of high-income countries where income stability is higher and income levels are higher.  

It is easy to blame banks and financial institutions for insisting on a higher risk premium. But, if banks and financial institutions are not willing to lend to them, low-income households will be forced to approach the money lenders who are more likely to offer a really raw deal.

The other costs associated with offering a loan are also higher in the case of low-income home buyers. Low-income home buyers, for example, are likely to borrow small amounts of money. So, the fixed costs involved in the home loan process still apply to them. This is a burden on banks and financial institutions.

Low-income households also do not benefit much from mortgage interest rate deductions, in many countries. So, repaying the loan is more difficult for them. Even though mortgage interest rate deductions are good, such policies still subsidise high-income households more.

More importantly, as of 2015, about 38 per cent of the adults in the world are unbanked. Most of these people are in developing countries. The situation was worse earlier. In 2011, about half the people in the world were unbanked. Even today, many of the people who have bank accounts do not use them. They do not have much savings, and lending to them is riskier. They are not very familiar with the process. Illiteracy is also much higher in low-income countries. Even when people are literate, they are usually not in a position to handle the challenges the banking system presents.

In developed countries, the financial system is more evolved, and such problems do not pose much of a risk. Underwriting is less complex. There is also more data about borrowers.