Working Paper: NBER ID: w23861
Authors: James Cloyne; Kilian Huber; Ethan Ilzetzki; Henrik Kleven
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.
Keywords: house prices; household borrowing; collateral effects; UK mortgage market
JEL Codes: D14; E21; E32; E43; E51; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| House Price Appreciation (R31) | Increase in Household Borrowing (G51) |
| House Prices (R31) | Increase in Household Borrowing (G51) |
| Higher Loan-to-Value Ratios (G51) | Higher Elasticity of Borrowing with Respect to House Prices (G51) |
| House Price Growth Relaxing Credit Constraints (R31) | Higher Borrowing Elasticity (D12) |
| House Price Growth Reinforcing Credit Constraints (E51) | Zero Borrowing Elasticity (D11) |