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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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Paper provided by Bank of England in its series Bank of England working papers with number 294.

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Date of creation: Mar 2006
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Handle: RePEc:boe:boeewp:294

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  1. François Ortalo-Magné & Sven Rady, 2002. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints," Wisconsin-Madison CULER working papers 02-01, University of Wisconsin Center for Urban Land Economic Research.
  2. Stein, Jeremy C, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 379-406, May.
  3. David Genesove & Christopher Mayer, . "Loss Aversion and Seller Behavior: Evidence from the Housing Market," Zell/Lurie Center Working Papers 323, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  4. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," CEPR Discussion Papers 1615, C.E.P.R. Discussion Papers.
  5. Sven Rady, 1998. "Boom In, Bust Out: Young Households and the Housing Price Cycle," FMG Discussion Papers dp310, Financial Markets Group.
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  7. Jappelli, Tullio & Pagano, Marco, 1989. "Consumption and Capital Market Imperfections: An International Comparison," American Economic Review, American Economic Association, vol. 79(5), pages 1088-1105, December.
  8. Andrew Benito, 2002. "Does Job Insecurity Affect Household Consumption?," Banco de Espa�a Working Papers 0225, Banco de Espa�a.
  9. Krainer, John, 2001. "A Theory of Liquidity in Residential Real Estate Markets," Journal of Urban Economics, Elsevier, vol. 49(1), pages 32-53, January.
  10. Mark Andrew & Geoffrey Meen, 2003. "Housing Transactions and the Changing Decisions of Young Households in Britain: The Microeconomic Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(1), pages 117-138, 03.
  11. Ermisch, John, 1996. "The Demand for Housing in Britain and Population Ageing: Microeconometric Evidence," Economica, London School of Economics and Political Science, vol. 63(251), pages 383-404, August.
  12. Engelhardt, Gary V., 2003. "Nominal loss aversion, housing equity constraints, and household mobility: evidence from the United States," Journal of Urban Economics, Elsevier, vol. 53(1), pages 171-195, January.
  13. Andrew Caplin & Sewin Chan & Charles Freeman & Joseph Tracy, 1997. "Housing Partnerships: A New Approach to a Market at a Crossroads," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032430, December.
  14. Ortalo-Magne, Francois & Rady, Sven, 2004. "Housing transactions and macroeconomic fluctuations: a case study of England and Wales," Journal of Housing Economics, Elsevier, vol. 13(4), pages 287-303, December.
  15. Jappelli, Tullio & Pagano, Marco, 1992. "Saving, Growth and Liquidity Constraints," CEPR Discussion Papers 662, C.E.P.R. Discussion Papers.
  16. Boheim, Rene & Ermisch, John, 2001. " Partnership Dissolution in the UK--The Role of Economic Circumstances," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(2), pages 197-208, May.
  17. Engelhardt, Gary V, 1996. "Consumption, Down Payments, and Liquidity Constraints," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 255-71, May.
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Cited by:
  1. Andrew Benito, 2007. "Housing equity as a buffer: evidence from UK households," Bank of England working papers 324, Bank of England.

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