Housing Equity as a Buffer: Evidence from UK Households

Abstract

The decision to extract home equity is examined using household-level data for the United Kingdom, 1993 to 2003. At its peak during the period, around one in ten homeowners withdrew equity per year. The paper finds that the equity withdrawal decision conforms to predictions from the standard life-cycle framework and models that predict its use as a financial buffer. The paper also estimates responses to the large house price appreciation and significant reductions in mortgage rates seen during the period. This has implications for the size of the 'collateral channel' and credit channel models of monetary policy.