Hamish Low, Cambridge University

Consumption spending, housing investments and the role of leverage

Abstract

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. When house prices rise, leveraged households respond to the reduction in their loan-to-value ratios by borrowing and investing in their homes in order to re-leverage their portfolios.

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Hamish Low received his PhD in Economics at the University College London. He is currently working as a Professor of Economics at the University of Cambridge and is a Fellow at Trinity College, Cambridge and a Research Fellow at the Institute for Fiscal Studies. His research interests include life-cycle behavior, including savings, consumption and working patterns of households.