Working Paper: CEPR ID: DP17188
Authors: Peter Levell; Hamish Low; Thomas F. Crossley
Abstract: Household borrowing and spending rise with house prices, particularly for leveraged households, but household spending is not consumption. We propose an alternative borrow-to-invest motive by which house price gains affect household spending on residential investment: rational, leveraged households have an incentive to make additional residential investments when house prices rise. We test this motive by comparing responses in different categories of spending across more and less leveraged households. We find strong evidence of the borrow-to-invest motive in UK data. Credit constraints matter through reducing access to leveraged returns and so reducing lifetime resources, rather than through consumption smoothing.
Keywords: house prices; leverage; consumption; home investment
JEL Codes: E21; D14; D15; G51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| House price increases (R31) | Increased household borrowing (G51) |
| Increased household borrowing (G51) | Increased residential investment (R31) |
| House price increases (R31) | Increased residential investment (R31) |
| House price increases (R31) | No significant change in consumption spending (E21) |