Household Spending Dynamics: The Impact of House Price-Rent Spread and Credit Constraints

Karolis Bielskis () and Povilas Lastauskas
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Karolis Bielskis: Bank of Lithuania and Vilnius University

No 122, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: This paper explores how fluctuations in the house price-rent spread influence household spending, taking into account credit constraints. We incorporate a housing spread shock, representing changes in the future value of residential property, into a model of household decisionmaking with borrowing frictions. Using halfcentury data from 28 OECD countries, we find that housing spread shocks are more persistent than credit shocks, which induce ‘boom-bust’ dynamics. We also identify asymmetries once the joint effect of shocks to housing spread and borrowing frictions is analyzed, particularly in crisis periods, underscoring the importance of policies addressing credit conditions and household expectations to stabilize the economy when traditional tools are less effective.

Keywords: household expectations; house price-rent spread; credit frictions; interest rates; household consumption (search for similar items in EconPapers)
JEL-codes: D15 E21 E5 G51 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2024-04-22
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