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Housing Debt and Consumption

Author

Listed:
  • Viola Angelini
  • Peter Simmons

Abstract

The interaction between housing wealth, the financial portfolio of the consumer and consumption is a live issue. Life cycle models with closed form solutions under uncertainty are hard to find. In this paper we find analytical solutions for the effects of house price uncertainty and employment risk on consumption, savings and mortgage finance in a finite horizon life-cycle model. In each period the consumer decides whether to withdraw equity from the house or not, subject to a transaction cost and a constraint on the maximum mortgage loan to house value ratio. Despite risk aversion we findthat, if borrowing is allowed in the financial asset, the prime portfolio effect is the spread between the interest rate and the mortgage rate. House price uncertainty has an ambiguous effect on consumption, which depends on the interest rate differential and house price expectations since future house prices affect future remortgage possibilities. If unsecured debt is not possible, we find that the possibility of future liquidity constraints can reduce mortgage borrowing below the maximum possible.

Suggested Citation

  • Viola Angelini & Peter Simmons, "undated". "Housing Debt and Consumption," Discussion Papers 11/20, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:11/20
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    References listed on IDEAS

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    More about this item

    Keywords

    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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