The effect of house prices on household borrowing: A new approach

摘要

It is an accepted fact that house prices and household borrowing are interrelated. This article reinvestigates the effect of house prices on household borrowing and the drivers. Causal identification is difficult since house price variations are endogenous. Recent studies consider the price growth across geographic areas however, this excludes regional shocks. This study examines the effect of house prices on borrowing. The borrowing decisions on refinancers' administrative data are analyzed to examine the variations in mortgage contracts. The data has information on individual house prices and provides unbiased estimates of house prices. The data has a panel dimension as many owners refinance many times during the eleven-year period under study. Refinancing is very common in the United Kingdom since long-term fixed interest mortgages are not available. Most of the mortgages have very low interest rates for a short period of two to five years. Thereafter, the interest rate increases. The timing of refinancing starts at the end of the low interest period. Following are the main findings of this study. First, as house prices increase, house owners borrow more by extracting equity from their home. The second result is that that two factors affect borrowing: wealth effects and collateral effects. The wealth effect is more on older house owners who have a shorter period to borrow. The collateral effect will be more for home owners who have longer time periods. A multivariate and nonparametric analysis is carried out to study the impact of heterogeneity in elasticity of borrowing with respect to house prices.