Author (Corporate) | European Commission: DG Economic and Financial Affairs |
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Series Title | European Economy: Economic Papers |
Series Details | No.445, September 2011 |
Publication Date | September 2011 |
ISBN | 978-92-79-19229-6 |
ISSN | 1725-3187 |
EC | KC-AI-11-445-EN-N |
Content Type | Journal | Series | Blog, Report |
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. |
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Source Link | Link to Main Source http://ec.europa.eu/economy_finance/publications/economic_paper/2011/ecp445_en.htm |
Countries / Regions | Europe |