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Household debt, house prices and consumption in the United Kingdom: a quantitative theoretical analysis

Author

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  • Waldron, Matt

    (Bank of England)

  • Zampolli, Fabrizio

    (Bank of England)

Abstract

Household debt and house prices in the United Kingdom rose substantially between 1987 and 2006. In this paper we use a calibrated overlapping generations model of the household sector to examine the extent to which changes in demographics, lower inflation, and a lower long-run real interest rate may explain the build-up of debt and the rise in house prices over that period. Our model suggests that lower real interest rates were particularly important. If households expected lower real interest rates to persist, then the model can more than explain the rise in debt and can explain most of the rise in house prices. However, the model leaves a puzzle because it predicts that an unanticipated fall in real interest rates should lead to a consumption boom that did not materialise in the data.

Suggested Citation

  • Waldron, Matt & Zampolli, Fabrizio, 2010. "Household debt, house prices and consumption in the United Kingdom: a quantitative theoretical analysis," Bank of England working papers 379, Bank of England.
    • Handle: RePEc:boe:boeewp:0379
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    Cited by:

    1. Hanna Augustyniak & Laszek Jacek & Krzysztof Olszewski & Joanna Waszczuk, 2013. "Modelling of cycles in the residential real estate market – interactions between the primary and the secondary market and multiplier effects," NBP Working Papers 143, Narodowy Bank Polski.
    2. Shaofeng Xu, 2013. "An Equilibrium Analysis of the Rise in House Prices and Mortgage Debt," Staff Working Papers 13-9, Bank of Canada.
    3. Bove Guillaume & Dees Stéphane & Thubin Camille, 2020. "House Prices, Mortgage Debt Dynamics and Economic Fluctuations in France: A Semi-Structural Approach," Working papers 787, Banque de France.
    4. Noëmie Lisack & Rana Sajedi & Gregory Thwaites, 2021. "Population Aging and the Macroeconomy," International Journal of Central Banking, International Journal of Central Banking, vol. 17(2), pages 43-80, June.
    5. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.

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    More about this item

    Keywords

    Consumption; housing market; collateral constraints; life cycle; OLG;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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