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Household savings and mortgage decisions: the role of the "down-payment channel" in the euro area

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  • Narcissa Balta
  • Eric Ruscher

Abstract

This paper analyses the interactions between household wealth, mortgage decisions and savings in a single empirical framework and identifies an important role for a "down-payment channel" in the euro area. Contrary to the traditional housing wealth channel, the "down-payment channel" posits a positive relation between household savings and house prices: a rise in house prices forces credit-constrained households who wish to acquire a house to accumulate more savings in order to cover a higher down-payment (i.e. the share of the housing acquisition value that is not covered by a mortgage). The overall effect of a rise in house prices on private consumption can be seen as the result of two offsetting forces: a rise in house prices tends to push up consumption via the traditional housing wealth channel but it also tends to depress the consumption of credit-constrained households who wish to acquire a house via the down-payment channel. Estimates based on a structural VEC model for the euro area suggest that the down-payment effect tends to dominate in the medium term, translating into an overall negative impact of higher house prices on consumption in the euro area.

Suggested Citation

  • Narcissa Balta & Eric Ruscher, 2011. "Household savings and mortgage decisions: the role of the "down-payment channel" in the euro area," European Economy - Economic Papers 2008 - 2015 445, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    • Handle: RePEc:euf:ecopap:0445
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    Cited by:

    1. 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.
    2. Danilo Liberati & Valerio Vacca, 2016. "With (more than) a little help from my bank. Loan-to-value ratios and access to mortgages in Italy," Questioni di Economia e Finanza (Occasional Papers) 315, Bank of Italy, Economic Research and International Relations Area.
    3. Riccardo De Bonis & Danilo Liberati & John Muellbauer & Concetta Rondinelli, 2020. "Consumption and wealth: new evidence from Italy," Temi di discussione (Economic working papers) 1304, Bank of Italy, Economic Research and International Relations Area.
    4. Jaanika Meriküll, 2015. "Household Borrowing During a Creditless Recovery," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(5), pages 1051-1068, September.
    5. Muellbauer, John & Geiger, Felix & Rupprecht, Manuel, 2016. "The housing market, household portfolios and the German consumer," Working Paper Series 1904, European Central Bank.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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