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Housing Debt, Employment Risk and Consumption


  • Viola Angelini
  • Peter Simmons


We consider the interaction between the risk of unemployment, random house prices, consumption and savings. A critical decision is that of refinancing house purchase, up to 100% mortgages are possible. There is also a fixed transaction cost of refinancing. In a CARA framework we derive the value function for a finite horizon, the policy of refinance and the consumption function. Either there is a maximum mortgage or a zero mortgage depending on interest rates, house prices and the transaction cost. The consumption function is linear in wealth and in the uncertainty caused by employment status and house prices of the future. Since there is either 100% or 0% equity withdrawal, consumption jumps when there is refinancing.

Suggested Citation

  • Viola Angelini & Peter Simmons, "undated". "Housing Debt, Employment Risk and Consumption," Discussion Papers 05/07, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:05/07

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    References listed on IDEAS

    1. John Y. Campbell & João F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1449-1494.
    2. Martin Browning & Thomas F. Crossley, 2001. "The Life-Cycle Model of Consumption and Saving," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 3-22, Summer.
    3. Gabriella Berloffa & Peter Simmons, 2003. "Unemployment Risk, Labour Force Participation and Savings," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 521-539.
    4. Orazio Attanasio & Susanne Rohwedder, 2001. "Pension wealth and household saving: evidence from pension reforms in the UK," IFS Working Papers W01/21, Institute for Fiscal Studies.
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    Cited by:

    1. Declan French & Donal McKillop & Tripti Sharma, 2017. "Analysis of Housing Equity Withdrawal by its Forms," CHaRMS Working Papers 17-04, Centre for HeAlth Research at the Management School (CHaRMS).
    2. Angelini, Viola, 2009. "Consumption and habit formation when time horizon is finite," Economics Letters, Elsevier, vol. 103(2), pages 113-116, May.
    3. Andrew Benito & Haroon Mumtaz, 2006. "Consumption excess sensitivity, liquidity constraints and the collateral role of housing," Bank of England working papers 306, Bank of England.
    4. Viola Angelini, 2006. "Mortgage Refinancing and Consumption Smoothing," Discussion Papers 06/26, Department of Economics, University of York.
    5. 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.
    6. Andrew Benito, 2007. "Housing equity as a buffer: evidence from UK households," Bank of England working papers 324, Bank of England.

    More about this item


    Precautionary savings; employment risk; mortgages; housing;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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