Income inequality, mortgage debt and house prices

63 Pages Posted: 1 Jun 2021

Date Written: May 21, 2021

Abstract

This paper studies housing and credit market implications of increasing income inequality and discusses how a low interest rate environment can alter its consequences. I develop an analytical general equilibrium model with a novel borrower risk composition channel of income inequality. Following a rise in income inequality house prices and mortgage debt decline, and aggregate default risk increases. I then show that low real rates mitigate the depressing effect of inequality on house prices at the cost of amplifying the aggregate default risk. Using a panel of US states and instrumental variables approach, I verify the model’s predictions.

Keywords: Income inequality, mortgage lending, mortgage default, house prices, real interest rates, risk taking, shift-share instruments

JEL Classification: D31, E44, E58, G21, R21

Suggested Citation

Kösem, Sevim, Income inequality, mortgage debt and house prices (May 21, 2021). Bank of England Working Paper No. 921, Available at SSRN: https://ssrn.com/abstract=3855541 or http://dx.doi.org/10.2139/ssrn.3855541

Sevim Kösem (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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