Precaution and Liquidity in the Demand for Housing

Ronald Balvers and László Szerb

Economic Inquiry, 2000, vol. 38, issue 2, 289-303

Abstract: We exploit cross-sectional mortgage data to investigate the importance of liquidity constraints and a precautionary motive in the demand for housing. Households that are not liquidity constrained consume housing services essentially as the life cycle hypothesis suggests but with a significant precautionary component. Households that are liquidity constrained, in terms of not meeting standard loan-to-value or payments-to-income constraints, are similar to unconstrained households in most respects, including the precautionary motive, but they respond somewhat less to fluctuations in their lifetime income--suggesting some influence of bank-induced liquidity constraints. We additionally find, however, that banks enforce liquidity constraints only weakly. Copyright 2000 by Oxford University Press.

Date: 2000
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