Income inequality, mortgage debt and house prices

Sevim Kösem ()
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Sevim Kösem: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 921, Bank of England working papers from Bank of England

Abstract: This paper studies housing and credit market implications of increasing income inequality and discusses how a low interest rate environment can alter its consequences. I develop an analytical general equilibrium model with a novel borrower risk composition channel of income inequality. Following a rise in income inequality house prices and mortgage debt decline, and aggregate default risk increases. I then show that low real rates mitigate the depressing effect of inequality on house prices at the cost of amplifying the aggregate default risk. Using a panel of US states and instrumental variables approach, I verify the model’s predictions.

Keywords: Income inequality; mortgage lending; mortgage default; house prices; real interest rates; risk taking; shift-share instruments (search for similar items in EconPapers)
JEL-codes: D31 E44 E58 G21 R21 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2021-05-21
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0921

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