The main purpose of this paper is to study the effect of consumer expertise on mortgage loan prices. We argue that consumer expertise should affect price due to two reasons: (1) loan mortgage prices in non-price-regulated settings are usually the result of a bank-customer negotiation process; and (2) a mortgage loan is a complex product.
Data on mortgage loan prices were used for a sample of 1,055 households for 2005 (Bank of Spain Survey of Household Finances, EFF-2005).
The regression results indicate that consumer expertise-related metrics are highly significant as predictors of mortgage loan prices. Findings also indicate that cost-related variables and a measure of risk with low discrimination power (i.e. having a permanent employment contract, which accounts for 70 per cent of contracts in Spain) affect price. Surprisingly, more sophisticated measures of credit risk do not have such a significant impact on mortgage prices.
Empirical results refer to the credit conditions prior to the financial crisis and could shed some light on the factors that led to it.
Findings seem to indicate that, in the period under study, bank managers prioritized capturing new business in the short-term against normative prescriptions, which suggest that price should be credit-risk adjusted (financial literature) and long-term consumer potential adjusted (marketing literature). The post-2008 difficult economic situation of Spanish banks (linked to an excessive portfolio of mortgage loans granted at very low prices) shows that these strategies were wrong.
An uncommon perspective was adopted. The importance of consumer expertise-related variables on price has been underemphasized by prior research. The effect of consumer expertise is assessed by using a large and comprehensive database.
Financial support from MEC (ECO2012-35820 and ECO 2010-20792), the Basque Government (DEUI, IT-IT783-13 and GMS, IT-601-13) and UPV/EHU (UFI 11/46 BETS and UFI 11/51 DEGTS) is gratefully acknowledged. The authors are most grateful to the Editor, Professor Malcolm Wright, and three reviewers for their very helpful comments and suggestions made on earlier drafts of this article.
M. Barrutia, J. and Paz Espinosa, M. (2014), "Consumer expertise matters in price negotiation: An empirical analysis of the determinants of mortgage loan prices in Spain prior to the financial crisis", European Journal of Marketing, Vol. 48 No. 11/12, pp. 1962-1985. https://doi.org/10.1108/EJM-04-2013-0208
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