Abstract
Abstract This paper investigates the financial vulnerability dynamics of indebted homeowners over the housing cycle using an agent-based housing market model, calibrated with UK microdata. The findings suggest that financial vulnerability is primarily driven by house purchases and dissaving due to a wealth effect on consumption. The former is more important during house price upswings, while the latter becomes significant at high price levels. Additionally, current vulnerability is path-dependent on previous purchases at high prices, as these purchases, due to a wealth effect, result in temporarily elevated consumption and consequently reduced financial buffers.
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