The Effect of House Prices on Household Borrowing: A New Approach

56 Pages Posted: 28 Feb 2017

See all articles by James Cloyne

James Cloyne

University College London - Department of Economics

Kilian Huber

London School of Economics & Political Science (LSE) - London School of Economics

Ethan Ilzetzki

London School of Economics & Political Science (LSE) - Department of Economics

Henrik Kleven

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)

Date Written: February 24, 2017

Abstract

We investigate the effect of house prices on household borrowing using administrative mortgage data from the United Kingdom and a new empirical approach. The data contain household-level information on house prices and borrowing in a panel of homeowners, who refinance at regular and quasi-exogenous intervals. The data and setting allow us to develop an empirical approach that exploits house price variation coming from idiosyncratic and exogenous timing of refinance events around the Great Recession. We present two main results. First, there is a clear and robust effect of house prices on borrowing, but the responsiveness is smaller than recent US estimates. Second, the effect of house prices on borrowing can be explained largely by collateral effects. We study the collateral channel in two ways: through a multivariate heterogeneity analysis of proxies for collateral and wealth effects, and through a test that exploits interest rate notches that depend on housing collateral.

Keywords: House prices, household borrowing, collateral channel

JEL Classification: D14, E21, E32, E43, E51, G21

Suggested Citation

Cloyne, James and Huber, Kilian and Ilzetzki, Ethan and Kleven, Henrik, The Effect of House Prices on Household Borrowing: A New Approach (February 24, 2017). Bank of England Working Paper No. 650. Available at SSRN: https://ssrn.com/abstract=2924444 or http://dx.doi.org/10.2139/ssrn.2924444

James Cloyne (Contact Author)

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Kilian Huber

London School of Economics & Political Science (LSE) - London School of Economics ( email )

United Kingdom

Ethan Ilzetzki

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Henrik Kleven

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
63
rank
342,258
Abstract Views
361
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information