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Household Spending Dynamics: The Impact of House Price-Rent Spread and Credit Constraints

Author

Listed:
  • Karolis Bielskis

    (Bank of Lithuania and Vilnius University)

  • Povilas Lastauskas

    (Queen Mary University of London)

Abstract

This paper explores how fluctuations in the house price-rent spread influence household spending, taking into account credit constraints. We incorporate a housing spread shock, representing changes in the future value of residential property, into a model of household decisionmaking with borrowing frictions. Using halfcentury data from 28 OECD countries, we find that housing spread shocks are more persistent than credit shocks, which induce ‘boom-bust’ dynamics. We also identify asymmetries once the joint effect of shocks to housing spread and borrowing frictions is analyzed, particularly in crisis periods, underscoring the importance of policies addressing credit conditions and household expectations to stabilize the economy when traditional tools are less effective.

Suggested Citation

  • Karolis Bielskis & Povilas Lastauskas, 2024. "Household Spending Dynamics: The Impact of House Price-Rent Spread and Credit Constraints," Bank of Lithuania Working Paper Series 122, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:122
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    More about this item

    Keywords

    household expectations; house price-rent spread; credit frictions; interest rates; household consumption;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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