House Prices, Second Mortgages and Household Savings: An Empirical Investigation for the Netherlands, 1987-1994

Abstract

Since the beginnings of the eighties house prices in the Netherlands have increased steadily and considerably. In this paper we study the effect of this development on the demand for second mortgages and on the savings of Dutch households. We use the data of the Dutch socio-economic panel for the years 1987-1994. These data contain self-reported values of the houses of owner-occupiers, which are shown to correspond to the median sales prices provided by the Dutch Association of Realtors. Households therefore seem to be well aware of the increase in the value of their house. We use panel data methods to investigate the effect of house prices on (i) the number and size of second mortgages, (ii) the savings of owner-occupiers and (iii) the savings of renters that may be considered as would-be owners. We find a significant effect of home equity on the demand for second mortgages. Savings of homeowners decrease when house prices accelerate. We find no evidence that increased demand for mortgage loans is caused by substitution from other forms of consumer credit. Contrary to results reported in the literature, we find no evidence of an increase in savings of would-be owners caused by higher house prices.