Consumer expertise matters in price negotiation An empirical analysis of the determinants of mortgage loan prices in Spain prior to the financial crisis

Purpose - 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. Design/methodology/approach - 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). Findings - 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. Research limitations/implications - Empirical results refer to the credit conditions prior to the financial crisis and could shed some light on the factors that led to it. Practical implications -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. Originality/value - 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.