I feel wealthy: house prices and household indebtedness

October 11, 2020

Increases in house prices are known to stimulate households’ consumption. Since residential property is an illiquid asset, households may have to increase debt to adjust their current expenditure to their new perceived wealth. This study is particularly relevant given the recent significant rise in property values in Portugal pre COVID-19.

This paper relies on microdata retrieved from the first wave of the Household Finance and Consumption Survey to examine the response of household debt to households’ perception of their residential properties’prices. The study concentrates on the effects of a change in housing wealth, as reported by the homeowner, on the average amount of debt held by Portuguese households. The study discriminates total debt betweenmortgage debt and non-mortgage debt.

The results indicate that households who feel they have benefitted from house price appreciation have a higher propensity to have more non-mortgage debt. However, the study finds no significant effect on overall debt.

The remaining results confirm the evidence in other studies and for other countries. First, wealth in real assets is a poor predictor of indebtedness, while financial wealth is negatively associated with the probability of indebtedness. Second, a decrease in household’s living standards increases the probability of indebtedness. Third, lower-income households are more prone to use housing as collateral, while wealthier households display relatively higher over-indebtedness ratios in response to housing wealth.

Click here to go to the paper by Sofia Vale and Francisco Camões.