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Income inequality, mortgage debt and house prices

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  • Kösem, Sevim

    (Bank of England)

Abstract

This paper studies housing and credit market implications of increasing income inequality and discusses how a low interest rate environment can alter its consequences. I develop an analytical general equilibrium model with a novel borrower risk composition channel of income inequality. Following a rise in income inequality house prices and mortgage debt decline, and aggregate default risk increases. I then show that low real rates mitigate the depressing effect of inequality on house prices at the cost of amplifying the aggregate default risk. Using a panel of US states and instrumental variables approach, I verify the model’s predictions.

Suggested Citation

  • Kösem, Sevim, 2021. "Income inequality, mortgage debt and house prices," Bank of England working papers 921, Bank of England.
    • Handle: RePEc:boe:boeewp:0921
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    References listed on IDEAS

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    More about this item

    Keywords

    Income inequality; mortgage lending; mortgage default; house prices; real interest rates; risk taking; shift-share instruments;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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