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House Price Volatility and Household Indebtedness in the United States and the United Kingdom

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  • Richard Disney
  • John Gathergood

Abstract

Recent household financial models predict that collateral-constrained households are more likely to increase debt-financed spending in response to rising house values. We augment this model to consider the use of unsecured debt such as credit cards. Using household panel data, we consider microeconomic evidence on the behaviour of households in the United States and the United Kingdom in response to rising house prices. The evidence confirms that previously collateral-constrained households in both countries increase their indebtedness more than unconstrained households as house prices rose. But whereas United Kingdom households used house price gains primarily to refinance existing unsecured debt, United States households were more likely to increase their total indebtedness. Our results imply that on average households in the United States extract as much as 10% of their housing equity gains to fund consumption spending, and suggest that housing wealth effects predominantly arise through unbinding liquidity constraints.

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File URL: http://www.nottingham.ac.uk/cfcm/documents/papers/09-02.pdf
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Bibliographic Info

Paper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 09/02.

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Handle: RePEc:not:notcfc:09/02

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Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
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Web page: http://www.nottingham.ac.uk/cfcm/index.aspx
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Related research

Keywords: Housing wealth; collateral; unsecured debt; consumer spending.;

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Cited by:
  1. Umar Faruqui & Samah Torchani, 2012. "How Important Are Liquidity Constraints for Canadian Households? Evidence from Micro-Data," Discussion Papers 12-9, Bank of Canada.
  2. repec:asi:ajoerj:2013:p:785-807 is not listed on IDEAS

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