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House Prices, Consumption and the Role of Non-Mortgage Debt

  • Katya Kartashova
  • Ben Tomlin

This paper examines the relationship between house prices and consumption, through the use of debt. Using unique Canadian household-level data that reports the uses of debt, we begin by looking at the relationship between house prices and debt. Using quantile regression, we find a positive and significant relationship between regional house prices and total household debt all along the conditional debt distribution. This suggests that the household-level relationship between house prices and debt goes beyond the purchase of real estate. We then find a positive relationship between house prices and non-mortgage debt (the sum of secured lines of credit, unsecured lines of credit, leases and other consumer loans, except for credit cards) for homeowners. Combining these results with the reported uses of non-mortgage debt allows us to connect house prices and nonhousing consumption - this connection is new to the literature on house prices and consumption. We conclude that the increases in house prices over the 1999-2007 period were, indeed, associated with an increase in non-mortgage debt and non-housing consumption. Our results can be thought of as the establishment of a conservative lower bound for the overall relationship between house prices and aggregate consumption.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2013/01/wp2013-02.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 13-2.

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Length: 40 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:bca:bocawp:13-2
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  1. Jason Allen & H. Evren Damar & David Martinez-Miera, 2012. "Consumer Bankruptcy and Information," Working Papers 12-18, Bank of Canada.
  2. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  3. Engelhardt Gary V., 1994. "House Prices and the Decision to Save for Down Payments," Journal of Urban Economics, Elsevier, vol. 36(2), pages 209-237, September.
  4. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 2132-56, August.
  5. Orazio Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2005. "Booms and busts: consumption, house prices and expectations," IFS Working Papers W05/24, Institute for Fiscal Studies.
  6. Jeannine Bailliu & Katya Kartashova & Césaire Meh, 2011. "Household Borrowing and Spending in Canada," Bank of Canada Review, Bank of Canada, vol. 2011(Winter), pages 16-29.
  7. Matteo Iacoviello & Marina Pavan, 2009. "Housing and debt over the life cycle and over the business cycle," Working Papers 09-12, Federal Reserve Bank of Boston.
  8. Moshe Buchinsky & Jinyong Hahn, 1998. "An Alternative Estimator for the Censored Quantile Regression Model," Econometrica, Econometric Society, vol. 66(3), pages 653-672, May.
  9. Shubhasis Dey & Ramdane Djoudad & Yaz Terajima, 2008. "A Tool for Assessing Financial Vulnerabilities in the Household Sector," Bank of Canada Review, Bank of Canada, vol. 2008(Summer), pages 47-56.
  10. Allan Crawford & Umar Faruqui, 2011. "What Explains Trends in Household Debt in Canada?," Bank of Canada Review, Bank of Canada, vol. 2011(Winter), pages 3-15.
  11. Moshe Buchinsky, 1998. "Recent Advances in Quantile Regression Models: A Practical Guideline for Empirical Research," Journal of Human Resources, University of Wisconsin Press, vol. 33(1), pages 88-126.
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