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