Credit, Housing Collateral and Consumption: Evidence from the U.K., Japan and the U.S.

Abstract

The consumption behaviour of UK, US and Japanese households is examined and compared using a modern Ando-Modigliani style consumption function. The models incorporate income growth expectations, income uncertainty, housing collateral and other credit effects. These models therefore capture important parts of the financial accelerator. The evidence is that credit availability for UK and US but not Japanese households has undergone large shifts since 1980. The average consumption-to-income ratio shifted up in the UK and US as mortgage downpayment constraints eased and as the collateral role of housing wealth was enhanced by financial innovations, such as home equity loans. The estimated housing collateral effect is roughly similar in the US and UK, while land prices in Japan still have a negative effect on consumer spending. Together with evidence for negative real interest rate effects in the UK and US and positive ones in Japan, this suggests important differences in the transmission of monetary and credit shocks between Japan and the US, UK and other credit-liberalized economies. Keywords consumption, credit conditions, housing collateral and housing wealth JEL Codes E21, E32, E44, E51 * We thank Jessica Renier for research assistance. An earlier version was presented at the American Economic Association meetings and at Statistics Norway, in 2009, and we are grateful for comments received. The views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Dallas, or the Board of Governors of the Federal Reserve System. Any remaining errors are our own. Research support is acknowledged from the ESRC under "Improving Methods for Macro-econometric Modelling", RES-000-23-0244.

Bank integration and co-movements across housing markets

“…Housing markets with stronger bank balance-sheet exposure show stronger housing return linkages. We have shown that bank integration can not15 The effects for the US and UK are consistent withAron et al (2012) who assess differences in housing wealth effects across Japan, the UK, and the US. only add additional information next to other spatial linkages -such as trade, FDI, geographic proximity, etc.…”

Financial literacy and mortgage equity withdrawals

“…Mortgage equity withdrawals (MEWs) supported consumption booms in the UK (Miles, 1992;and Muellbauer and Murphy, 1997) and US (Aron et al, 2012;Greenspan and Kennedy, 2008;Hurst and Stafford, 2004;andSufi, 2010, 2011). At the macro-level, MEWs are positively correlated with an increased sensitivity of consumption to housing wealth (Duca, 2006;Carroll et al, 2011) and at the micro level, with liquidity constraints (Benito, 2009;Browning et al, 2008;Hurst and Stafford, 2004).…”

Returning to Growth: Policy Lessons from History*

“…33 Office for National Statistics, 2006. 34 This is implied but not explicitly stated by Aron et al (2012). I am very grateful to John Muellbauer for extracting this estimate for me.…”

“…32 But this was also a supply-side reform that had a major short-term impact on the growth of aggregate demand, working in particular through the household savings ratio, which fell by about 7 percentage points between 1980 and 1987. 33 Econometric analysis by Aron et al (2012) that takes into account the direct and indirect (through house prices and household debt) implications of the change in credit conditions facing consumers suggests that financial liberalisation raised consumer spending by an amount equivalent to at least 3.5 per cent of GDP in 1987. 34 31 Cobham, 2002.…”