Mortgage-Backed Securities (MBS): Is it a curse or a blessing for the Australian home loan market? A natural experiment

The Australian home loan market has seen a significant and persistent boom over more than two decades. The extant literature exploring the underlying factors explaining this boom has predominantly looked at the demand side rather than the supply side. In this paper, we look at a major supply-side issue, the introduction of mortgage-backed securities and its likely impact on the home loan market. In doing so, we have developed a mathematical model that theorises this likely relationship. Our mathematical model predicts possible existence of an unstable equilibrium in the home loan market in the presence of mortgage-backed securities. We have subsequently backed up our theoretical exercise with sound empirical evidence acquired and analysed as a natural experiment in the Australian scenario using quarterly market data on home loans and mortgage-backed securities data for a 36-year period from 1976 to 2012. Using unknown structural break tests, we have identified significant breaks around late 1992 to mid-1995, clearly indicating that there were significant changes in the housing market due to the introduction of mortgage-backed securities in early 1993. We have also performed a stability test confirming that under certain conditions this market can become unstable.