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How does the down-payment constraint affect the UK housing market?

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  • Andrew Benito

Abstract

A house purchase typically requires a deposit (or down-payment) and so a significant amount of cash. This paper considers the empirical implications of this borrowing constraint for the housing market. It shows that, at the aggregate level, models of the housing market that incorporate the constraint are consistent with the following stylised facts: i) a positive correlation between house price inflation and transactions; ii) greater volatility of former owner-occupiers' house price inflation than for first-time buyers; iii) the presence of first-time buyers in the market falls with the rate of change of house prices; and iv) house prices are more sensitive to the incomes of the young. The paper then exploits variation across local housing markets in the rate of change in house prices and considers how leverage affects the response of the rate of change of house prices to shocks. The evidence, based on data for 147 district-level housing markets for the period 1993-2002, suggests that a large incidence of households with high levels of leverage (loan to value ratios) raises the sensitivity of house prices to a shock. This is also consistent with the down-payment constraint model of the housing market.

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  • Andrew Benito, 2006. "How does the down-payment constraint affect the UK housing market?," Bank of England working papers 294, Bank of England.
    • Handle: RePEc:boe:boeewp:294
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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2006/WP294.pdf
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    Cited by:

    1. David Gray & Caroline Elliott, 2015. "Are prices of New dwellings different? A spectral analysis of UK property vintages," Cogent Economics & Finance, Taylor & Francis Journals, vol. 3(1), pages 993860-9938, December.
    2. Andrew Benito, 2007. "Housing equity as a buffer: evidence from UK households," Bank of England working papers 324, Bank of England.
    3. Coates, Dermot & Lydon, Reamonn & McCarthy, Yvonne, 2015. "House price volatility: The role of different buyer types," Economic Letters 02/EL/15, Central Bank of Ireland.
    4. Alqaralleh, Huthaifa & Canepa, Alessandra, 2020. "Housing market cycles in large urban areas," Economic Modelling, Elsevier, vol. 92(C), pages 257-267.

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