Homeowners are more likely to take on additional debt as home values rise and a new study has looked into why
Homeowners are more likely to take on additional debt as home values rise and a new study has looked into why.
Princeton University professor Henrik Kleven and his colleagues considered why rising house prices tend to mean more household debt and more consumer spending.
Is it because they are able to secure more credit due to the equity in their homes or is it boosted confidence making homeowners feel richer?
The study reveals that better access to credit and lower rates is the main reason for the trend; and the house price swings during the study period allowed the researchers to assess the effect of house prices on the refinancers' decisions to extract equity from their homes through borrowing.
"All else equal," Kleven said, "the wealth effect should be larger for older homeowners who have short horizons and are therefore in a position to cash in on their housing wealth, and the collateral effect should be larger for more leveraged homeowners."
That’s because more leveraged owners will benefit more from the additional collateral from rising house prices.
By eliminating factors which could otherwise explain increases in borrowing, such as less-leveraged owners, the research team established a clear link between collateral and increased borrowing.
Kleven said that this strong relationship "has important implications for understanding household behavior" and for engineering "realistic responses to boom-bust cycles in the housing market."
Princeton University professor Henrik Kleven and his colleagues considered why rising house prices tend to mean more household debt and more consumer spending.
Is it because they are able to secure more credit due to the equity in their homes or is it boosted confidence making homeowners feel richer?
The study reveals that better access to credit and lower rates is the main reason for the trend; and the house price swings during the study period allowed the researchers to assess the effect of house prices on the refinancers' decisions to extract equity from their homes through borrowing.
"All else equal," Kleven said, "the wealth effect should be larger for older homeowners who have short horizons and are therefore in a position to cash in on their housing wealth, and the collateral effect should be larger for more leveraged homeowners."
That’s because more leveraged owners will benefit more from the additional collateral from rising house prices.
By eliminating factors which could otherwise explain increases in borrowing, such as less-leveraged owners, the research team established a clear link between collateral and increased borrowing.
Kleven said that this strong relationship "has important implications for understanding household behavior" and for engineering "realistic responses to boom-bust cycles in the housing market."
