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445 - Household savings and mortgage decisions: the role of the "down-payment channel" in the euro area

Narcissa Balta, Eric Ruscher, European Commission

Household savings and mortgage decisions: the role of the "down-payment channel" in the euro areapdf(712 kB) Choose translations of the previous link 

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This paper analyses the interactions between household wealth, mortgage decisions and savings in a single empirical framework and identifies an important role for a "down-payment channel" in the euro area. Contrary to the traditional housing wealth channel, the "down-payment channel" posits a positive relation between household savings and house prices: a rise in house prices forces credit-constrained households who wish to acquire a house to accumulate more savings in order to cover a higher down-payment (i.e. the share of the housing acquisition value that is not covered by a mortgage). The overall effect of a rise in house prices on private consumption can be seen as the result of two offsetting forces: a rise in house prices tends to push up consumption via the traditional housing wealth channel but it also tends to depress the consumption of credit-constrained households who wish to acquire a house via the down-payment channel. Estimates based on a structural VEC model for the euro area suggest that the down-payment effect tends to dominate in the medium term, translating into an overall negative impact of higher house prices on consumption in the euro area.

(European Economy. Economic Papers. 445. September 2011. Brussels. PDF. 26pp. Tab. Graph. Bibliogr. Free.)

KC-AI-11-445-EN-N (online)
ISBN 978-92-79-19229-6 (online)
doi:10.2765/11252 (online)

JEL classification: E21, E44, D12

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