National Culture and Default on Mortgages

• Author: Hassan F. Gholipour,Reza Tajaddini
• Date: 01 March 2017
• DOI: http://doi.org/10.1111/irfi.12113
• Published date: 01 March 2017

National Culture and Default on

Mortgages*

REZA TAJADDINI AND HASSAN F. GHOLIPOUR

Department of Accounting, Economics, and Finance, Faculty of Business and Law,

Swinburne University of Technology, Hawthorn, Victoria, Australia

ABSTRACT

In this paper, we investigate the relationship between national cultural

characteristics and default on mortgages (DOM). Using Hofstede’s constructs

and controlling for other relevant determinants of DOM, our regression

analyses show that borrowers from countries with high individualism may

default more on their mortgages in both a relatively stable economic period

and during a period of crisis. Moreover, we find that borrowers from societies

showing lower level of pragmatism and higher level of indulgence default

more on their mortgages in a stable economic period. Our findings suggest

important implications for multinational financial institutions that provide

mortgages across countries.

JEL Codes: Z100; G210

I. INTRODUCTION

Defaults on residential mortgages (DOM) have been extensively analysed in liter-

ature in the 1970s and 1980s (e.g. Green and Furstenberg 1975; Morton 1975;

Jackson and Kaserman 1980; Campbell and Dietrich 1983). Prior empirical

research has identified several economic factors (e.g. income, unemployment,

and house prices), socio-demographic factors (e.g. divorce and race), and health

characteristics of borrowers (e.g. prolonged illness and disability) as determinants

of DOM. In recent years, the need to understand the modern determinants of

DOM has received increasing attention by economists and policymakers

(e.g. Bernanke 2008; Igan and Pinheiro 2009; Quercia et al. 2012) because of

the recent rise in DOM and foreclosures in many advanced economies, especially

the USA, where this contributed to the recent Global Financial Crisis (GFC).

1

* We thank Necmi Kemal Avkiran and Toby Harfield for helpful conversations. We also thank

seminar participants at the 2015 Accounting and Finance Association of Australia and New Zealand

Conference, Hobart, Australia; and anonymous referees. Any errors are our own.

1 It should be noted that, on average, housing mortgages over the 2003–2013 period, account for

about 75% of total consumer lending in the developed economies. In emerging economies, the

share of housing mortgages to total consumer lending has also significantly increased over the

same period, growing from 39% in 2003 to around 50% in 2013 (Euromonitor International

2014).

© 2016 International Review of Finance Ltd. 2016

International Review of Finance, 17:1, 2017: pp. 107–133

DOI: 10.1111/irfi.12113

Recent evidence in behavioral finance literature (Seiler et al. 2012; Guiso et al.

2013) argues that DOM depends not only on the socio-demographic, economic,

and legal environment, but also on the behavioral characteristics of borrowers.

Such behaviors include shame, guilt and the social stigma associated with

defaulting, and views about fairness and morality; factors which all, to some

extent, are rooted in the national culture of a country. The purpose of this paper

is to explain the cross-country variation in DOM based on variations in cultural

dimensions, as well as a set of other common control variables (e.g. household

income (INC), unemployment (UNE), and house prices (HPI)) that mainly reflect

the ability/willingness of borrowers to pay their mortgages. The Hofstede cultural

dimensions used in this study include power distance, individualism versus

collectivism, masculinity versus femininity, uncertainty avoidance, pragmatism

versus normativeness, and indulgence versus restraint across 42 countries.

Our study is different from Guiso et al. (2013) and Seiler et al. (2012) in at least

two aspects: first, although uncertainty avoidance and collectivism dimensions

of Hofstede are to some extent similar to the variables such as fear, shame, and

social contagion in Guiso et al. (2013) and Seiler et al. (2012), they do not neces-

sarily explain the same concepts. In addition, there are other important cultural

dimensions such as pragmatism/normativeness and indulgence/restraint that

have not been examined in their studies. Second, Guiso et al. (2013) and Seiler

et al. (2012) used the US survey data, whereas in this paper we use international

data, which provide broader insights about the relationship between borrowers’

cultural values and mortgage default rates across countries.

Our research is not only motivated by the gap in literature but also by some

noteworthy observations. Although many countries strengthened their real

estate debt regulations and implemented very similar debt policies after the

GFC, a considerable difference in the mortgage default rate can be observed

among nations with differing cultural backgrounds. For example, Hong Kong

and Germany are classified as developed economies and have employed almost

the same debt and lending regulation in recent years.

2

However, over the

2010–2013 period, the average mortgage default rates for Hong Kong and

Germany are 0.05% and 2.80%, respectively. Likewise, Brazil and Russia are

classified as fast-growing emerging economies and have implemented very

similar debt and lending regulation. However, the mortgage default rates in

Brazil (4.40%) are double those in Russia (2.48%). This raises an important set

of questions: why do countries with almost the same level of real estate debt

regulation and economic development have such a different level of DOM? Do

any of the national cultural dimensions explain DOM?

2 According to the Regulatory and Legal sub-index scores of Jones Lang LaSalle’s (JLL) 2012 Global

Real Estate Transparency Index (which measures the availability of data on real estate debt and

the extent to which national regulators monitor that debt), a majority of developed economies

score the highest on the Regulatory and Legal sub-index. For more details, see http://www.

joneslanglasalle.co.jp/japan/ja-jp/Documents/Transparency/JLL_Transparency_2012_E.pdf

International Review of Finance

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