Household debt, house prices, and consumption in the UK: a theoretical analysis of recent developments
AbstractOver the last two decades the United Kingdom has experienced a dramatic increase in the amount of household debt and in the level of house prices. The question which interests us is the extent to which these developments can be explained through structural changes to the UK economy. These changes include: a fall in the real interest rate; lower inflation; more competitive unsecured borrowing rates; demographic changes. It is not easy to convincingly estimate the equilibrium levels of debt and house prices empirically. For this reason our approach in this paper is to construct a quantitative, general equilibrium, endowment, overlapping-generations model. The model is sufficiently rich and incorporates: housing and non-housing consumption; tenure and landlord choices; accidental and voluntary bequests; a spread between lending and deposit rates; a spread over secured and unsecured lending; loan-to-income and loan-to-value borrowing constraints; idiosyncratic income risk; realistic demographics. House prices and rents are endogenously determined. After calibrating the model to the UK we conduct a number of experiments to gauge the contribution to the observed increases in house prices and debt of each potentially relevant structural change (in particular, lower real interest rates and financial liberalisation). We compute different stationary equilibria as well as the transitional dynamics between old and new steady states. Transitions are very long lived in our model and therefore can be potentially important in explaining the current levels of house prices and debt. Our preliminary results (so far limited to financial liberalisation) suggests that relaxation of borrowing constraints can only explain a modest fraction of the boom in house prices and debt. We also investigate the implications for aggregate consumption.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 431.
Date of creation: 04 Jul 2006
Date of revision:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Winfried Koeniger & Thomas Hintermaier, 2009. "Bankruptcy and Debt Portfolios," 2009 Meeting Papers 348, Society for Economic Dynamics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.