A Dynamic Analysis of Mortgage Arrears in the UK

The UK economy has enjoyed an unprecedented period of positive economic growthsince the early 1990s. The absence of recession for more than a decade has been accompanied bya sustained decline in the level of mortgage arrears, as reported by major lenders. This paperseeks to examine the factors which have driven the reduction in mortgage arrears and, in doingso, identify those factors which are most likely to cause arrears to increase in the future, shouldeconomic conditions deteriorate. The paper employs the Johansen methodology to test for thepresence of multiple cointegrating vectors. An error correction model is estimated in order toexamine long-run and short-run dynamics in mortgage arrears. In line with previous researchconcerning the causes of mortgage arrears, the results presented here emphasise the importanceof changes in the rate of unemployment, loan–income and debt–service ratios. Moreimportantly, our results highlight the statistical significance of unwithdrawn housing equity asan explanatory variable with respect to mortgage arrears.