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Housing Debt and Consumption

Author

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  • Viola Angelini
  • Peter Simmons

Abstract

The interaction between housing wealth, the financial portfolio of the consumer and consumption is a live issue. Life cycle models with closed form solutions under uncertainty are hard to find. In this paper we find analytical solutions for the effects of house price uncertainty and employment risk on consumption, savings and mortgage finance in a finite horizon life-cycle model. In each period the consumer decides whether to withdraw equity from the house or not, subject to a transaction cost and a constraint on the maximum mortgage loan to house value ratio. Despite risk aversion we findthat, if borrowing is allowed in the financial asset, the prime portfolio effect is the spread between the interest rate and the mortgage rate. House price uncertainty has an ambiguous effect on consumption, which depends on the interest rate differential and house price expectations since future house prices affect future remortgage possibilities. If unsecured debt is not possible, we find that the possibility of future liquidity constraints can reduce mortgage borrowing below the maximum possible.

Suggested Citation

  • Viola Angelini & Peter Simmons, "undated". "Housing Debt and Consumption," Discussion Papers 11/20, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:11/20
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    Cited by:

    1. Declan French & Donal McKillop & Tripti Sharma, 2017. "Analysis of Housing Equity Withdrawal by its Forms," CHaRMS Working Papers 17-04, Centre for HeAlth Research at the Management School (CHaRMS).
    2. Viola Angelini, 2006. "Mortgage Refinancing and Consumption Smoothing," Discussion Papers 06/26, Department of Economics, University of York.
    3. Peter Simmons, 2010. "Effects of Structural Constraints and Costs on Choices," LABOUR, CEIS, vol. 24(s1), pages 25-45, December.
    4. Andrew Benito, 2009. "Who Withdraws Housing Equity and Why?," Economica, London School of Economics and Political Science, vol. 76(301), pages 51-70, February.
    5. Vivien Burrows, 2018. "The Impact of House Prices on Consumption in the UK: a New Perspective," Economica, London School of Economics and Political Science, vol. 85(337), pages 92-123, January.
    6. Andrew Benito & Haroon Mumtaz, 2006. "Consumption excess sensitivity, liquidity constraints and the collateral role of housing," Bank of England working papers 306, Bank of England.
    7. Ebner, André, 2013. "A micro view on home equity withdrawal and its determinants: Evidence from Dutch households," Journal of Housing Economics, Elsevier, vol. 22(4), pages 321-337.
    8. 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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    More about this item

    Keywords

    precautionary savings; employment risk; mortgages; housing;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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