Features
October 11, 2017
Boost in Collateral, Rather Than “Feeling Richer,” Drives Consumers to Borrow as Home Prices Rise
When home prices rise, households tend to borrow and spend more. But economists have had trouble identifying exactly what causes that relationship. Is it that when a house becomes worth more, borrowers are able to offer more collateral to secure a loan? Or is it that when a house is worth more, borrowers feel richer so are more willing to borrow and spend? A study by Princeton University professor Henrik Kleven and colleagues, published as a working paper on the National Bureau for Economic Research website, tries to tease this out. Their key finding is that the main mechanism driving householders to borrow and spend is the collateral effect — when…