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

59 Pages Posted: 25 Sep 2017

See all articles by James Cloyne

James Cloyne

University of California, Davis; Bank of England - Monetary Analysis

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

Princeton University - Woodrow Wilson School of Public and International Affairs

Date Written: September 2017

Abstract

We investigate the effect of house prices on household borrowing using administrative mortgage data from the UK 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 and non-parametric heterogeneity analysis of proxies for collateral and wealth effects, and through a test that exploits interest rate notches that depend on housing collateral.

Suggested Citation

Cloyne, James and Huber, Kilian and Ilzetzki, Ethan and Kleven, Henrik, The Effect of House Prices on Household Borrowing: A New Approach (September 2017). NBER Working Paper No. w23861. Available at SSRN: https://ssrn.com/abstract=3042417

James Cloyne (Contact Author)

University of California, Davis ( email )

One Shields Avenue
Davis, CA 95616
United States

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
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

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

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