Abstract
This paper examines the response of household debt to households’ perception of house prices using data from the first wave of the Household Finance and Consumption Survey. Whereas the literature has hitherto emphasized the effects of housing wealth on consumption, this study concentrates on the effects on debt accumulation—distinguishing mortgage debt from non-mortgage debt and inspecting over-indebtedness. Different measures of housing wealth are considered, controlling for tenure years. The findings reveal that the effects of housing wealth differ by type of loans and with the measure of housing wealth. Over-indebtedness is driven by the same factors that determine mortgage debt, suggesting a strong association between having outstanding liabilities from the primary residence and the risk of entering into default. Further estimations by different income and wealth classes revealed dissimilar housing wealth effects, with non-mortgage debt tending to rise among lower-income households and over-indebtedness tending to be larger among the wealthier.
Highlights
Until the 2007-2008 global economic crisis, advanced economies experienced a period of increased liquidity and unprecedentedly low interest rates in which household debt accumulated at a rate faster than GDP growth
This paper examines the relationship between household’s house prices perception and the size of the household debt, using data from the first wave of the Household Finance and Consumption Survey
This study tested at the household level the assumption that housing wealth as appraised by homeowners can mould their decision on how much debt to hold
Summary
Until the 2007-2008 global economic crisis, advanced economies experienced a period of increased liquidity and unprecedentedly low interest rates in which household debt accumulated at a rate faster than GDP growth. In the aftermath of the crisis, indebted households felt the pressure to sell their residential properties at low market values, several of them often incurring losses to avoid defaulting, contributing to a climate of instability that was to be heavily blamed on their former financial choices These occurrences and the acknowledgment that within developed countries housing wealth accounts for about half of households wealth, and that it tended to move together with aggregate consumption after the II World War (Iacoviello, 2005), motivated a surge of models that study the macroeconomic impacts of housing and the housing market
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