House Price Shocks, Credit Constraints and Household Indebtedness

Kadir Atalay, Garry Barrett, Rebecca Edwards and Chaoran Yu

Oxford Economic Papers, 2020, vol. 72, issue 3, 780-803

Abstract: We analyse the effect of housing wealth on household indebtedness in a life-cycle framework. Exploiting longitudinal household data and temporal and geographic variation in house prices, our empirical results indicate that households respond to increases in housing wealth by significantly increasing their debt. The effect is strongest for households that are moderately leveraged, highlighting the importance of collateral constraints. Furthermore, we uncover a weaker wealth effect from house price growth for households that have faced negative shocks to income or employment. Importantly, our findings are consistent with the theoretical predictions of the life-cycle model: households increase their mortgage debt, but not their unsecured credit card debt. A novel finding is that we uncover a moderate positive wealth effect on investment loans.

JEL-codes: D14 D15 D31 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (6)

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