House Prices, Home Equity, and Personal Debt Composition

Riksbank Research Paper Series No. 167

Sveriges Riksbank Working Paper Series No. 343

44 Pages Posted: 7 Nov 2019

See all articles by Jieying Li

Jieying Li

Sveriges Riksbank

Xin Zhang

Sveriges Riksbank - Research Division

Date Written: October 2017

Abstract

Using a monthly panel dataset of individuals' debt composition including mortgage and nonmortgage consumer credit, we show that house price changes can explain a significant fraction of personal debt composition dynamics. We exploit the variation in local house price growth as shocks to homeowners' housing wealth to study the consequential adjustment of personal debt composition. To account for local demand shocks and disentangle the housing collateral channel from the wealth effect, we use renters and non-equity-withdrawal homeowners in the same region as control groups. We present direct evidence that homeowners reoptimize their debt structure by using withdrawn home equity to pay down comparatively expensive short-term non-mortgage debt during a housing boom, unsecured consumer loans in particular. We also find that homeowners withdraw home equity to finance their entrepreneurial activities. Our study sheds new light on the dynamics of personal debt composition in response to changes in house prices.

Keywords: Household Decision, Personal Debt Management, Credit Constraint, Cash-out Refinancing, Entrepreneurship

JEL Classification: D14, G21, L26, R31

Suggested Citation

Li, Jieying and Zhang, Xin, House Prices, Home Equity, and Personal Debt Composition (October 2017). Sveriges Riksbank Working Paper Series No. 343. Available at SSRN: https://ssrn.com/abstract=3080189 or http://dx.doi.org/10.2139/ssrn.3080189

Jieying Li

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

Xin Zhang (Contact Author)

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

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