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Riding the Housing Wave: Home Equity Withdrawal and Consumer Debt Composition

Author

Listed:
  • Grodecka-Messi, Anna

    (Research Department, Central Bank of Sweden)

  • Li, Jieying

    (Financial Stability Department, Central Bank of Sweden)

  • Zhang, Xin

    (Research Department, Central Bank of Sweden)

Abstract

Using a monthly panel dataset of individuals’ debt, we show that house price changes can ex plain a significant fraction of personal debt composition dynamics. We exploit the variation in local house price growth as shocks to homeowners’ housing wealth to study the consequential adjustment of debt portfolio. We present direct evidence that homeowners re-optimize their debt structure by using parts of withdrawn home equity to pay down comparatively expensive non-mortgage debt during a housing boom. The effect is strongest for homeowners that have a high debt-to-income ratio and live in a municipality with a high literacy level. We find evidence that macroprudential policy and interest rates are important for consumer debt decisions.

Suggested Citation

  • Grodecka-Messi, Anna & Li, Jieying & Zhang, Xin, 2025. "Riding the Housing Wave: Home Equity Withdrawal and Consumer Debt Composition," Working Paper Series 452, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0452
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    File URL: https://www.riksbank.se/globalassets/media/rapporter/working-papers/2025/no.-452-riding-the-housing-wave-home-equity-withdrawal-and-consumer-debt-composition.pdf
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    More about this item

    Keywords

    Personal Debt Management; Home Equity Extraction; Household Debt; Housing; Financial Literacy; Macroprudential Policy.;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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