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Housing Equity Withdrawal, Property Bubbles and Consumption

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  • Lydon, Reamonn

    (Central Bank of Ireland)

  • O'Hanlon, Niall

    (Central Statistics Office)

Abstract

At the peak of the Irish property boom in the rst decade of the 2000s, housing equity withdrawal, or \top-up" loans, accounted for one-third of residential mortgage loans issued. This collateral-based lending was typically issued at a signi cant discount to other forms of personal lending, often at tracker rates. Following the collapse of the Irish housing market, the value of top-up loans issued in 2011 was down 97 percent from 2006 - the peak year for this form of lending. This paper draws out some of the trends in housing equity withdrawal over the last decade, both in terms of the extent of lending that occurred and the reasons for borrowers taking out such loans. From a domestic demand perspective, the concern would be the extent to which this form of borrowing fed into domestic consumption and the longer-terms implications for Irish economic growth. In this context we show that equity withdrawal trends are strongly positively correlated with a number of demand measures, mainly related to spending on durables.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 05/RT/12.

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Date of creation: Aug 2012
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Handle: RePEc:cbi:wpaper:05/rt/12

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References

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  1. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2001. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt44k6g6vx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Aoki, Kosuke & James Proudman & Gertjan Vlieghe, 2003. "House prices, consumption, and monetary policy: a financial accelerator approach," Royal Economic Society Annual Conference 2003, Royal Economic Society 7, Royal Economic Society.
  3. repec:cbi:wpaper:1/rt/08 is not listed on IDEAS
  4. Martin Browning & Thomas F. Crossley, 2001. "The Life-Cycle Model of Consumption and Saving," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(3), pages 3-22, Summer.
  5. Muellbauer, John & Murphy, Janine Aron & Ant & Aron, Janine & Murphy, Anthony, 2007. "Housing Wealth, Credit Conditions and Consumption," ERES, European Real Estate Society (ERES) eres2007_257, European Real Estate Society (ERES).
  6. Hogan, Vincent & O'Sullivan, Pat, 2007. "Consumption and House Prices in Ireland," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), Economic and Social Research Institute (ESRI), vol. 2007(3-Autumn), pages 46-61.
  7. Janine Aron & John Muellbauer, 2006. "Housing Wealth, Credit Conditions and Consumption," Economics Series Working Papers, University of Oxford, Department of Economics WPS/2006-08, University of Oxford, Department of Economics.
  8. Vladimir Klyuev & Paul S. Mills, 2006. "Is Housing Wealth An 'ATM'? the Relationship Between Household Wealth, Home Equity withdrawal, and Saving Rates," IMF Working Papers 06/162, International Monetary Fund.
  9. Herrala, Risto, 2010. "Credit constraints and durable consumption," Research Discussion Papers, Bank of Finland 15/2010, Bank of Finland.
  10. Ebner, André, 2013. "A micro view on home equity withdrawal and its determinants: Evidence from Dutch households," Journal of Housing Economics, Elsevier, Elsevier, vol. 22(4), pages 321-337.
  11. Kennedy, Gerard & McQuinn, Kieran, 2012. "Why are Irish house prices still falling?," Economic Letters 05/EL/12, Central Bank of Ireland.
  12. Andrew Benito, 2009. "Who Withdraws Housing Equity and Why?," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 76(301), pages 51-70, 02.
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Cited by:
  1. Gerlach, Petra, 2013. "The Effect of Unemployment, Arrears and Negative Equity on Consumption: Ireland in 2009/10," Papers, Economic and Social Research Institute (ESRI) WP457, Economic and Social Research Institute (ESRI).
  2. McCarthy, Yvonne & McQuinn, Kieran, 2013. "Price expectations, distressed mortgage markets and the housing wealth effect," Research Technical Papers 06/RT/13, Central Bank of Ireland.
  3. Gerlach, Petra & Merola, Rossana, 2013. "Consumption and Credit Constraints: A Model and Evidence for Ireland," Papers, Economic and Social Research Institute (ESRI) WP471, Economic and Social Research Institute (ESRI).

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