DP16144 The Consumption Response to Borrowing Constraints in the Mortgage Market

Author(s): Belinda Tracey, Neeltje Van Horen
Publication Date: May 2021
Keyword(s): Borrowing Constraints, Consumption, housing market, mortgage market
JEL(s): E21, G21, R21, R28
Programme Areas: Financial Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16144

This paper shows that relaxing borrowing constraints positively affects household consumption in addition to stimulating housing market activity. We focus on the UK Help-to-Buy (HTB) program, which provided a sudden relaxation of the down payment constraint by facilitating home purchases with only a five percent down payment. Our research design exploits geographic variation in exposure to HTB and uses administrative data on mortgages and car sales in combination with household survey data. We estimate that the program increased total home purchases by 11 percent, and the increase was driven almost entirely by first-time and young buyers. Regions that were more exposed to the program experienced a rise in non-durable consumption unrelated to the home and in loan-financed car purchases, in addition to an increase in home-related expenditures. These results are independent of changes in regional house prices. Our findings point to a further link between the housing market and household consumption that does not operate through the home purchase and housing wealth channels.