Consumption Spending, Housing Investments and the Role of LeverageAdd to Calendar
2:00 pm – 3:30 pm
University of Essex
In this paper we estimate the degree to which leverage amplifies the effects of house price shocks on consumer borrowing and spending. We show that households re-leverage in response to house price shocks by borrowing more as prices increase. We also find strong response of residential investment spending to house price gains that increase with households’ initial leverage. By contrast we find limited evidence of housing wealth effects on consumption spending. Our results can be rationalised in a framework where households treat leverage as a portfolio choice, choosing leverage to optimise the risk and return on their assets.