Housing equity withdrawal, property bubbles and consumption

1. INTRODUCTION In most developed countries housing wealth represents the largest share of net worth on the household balance sheet. In Ireland, the housing boom and bust over the last decade led to a rapid rise and fall in the value of housing assets. Between 2002 and 2007, the value of housing assets increased by almost 150 per cent. With the bursting of the property bubble this has declined by 41 per cent, wiping almost 250 billion [euro] off the nominal value of Irish housing assets (Central Bank of Ireland, 2012). In this context, understanding the interaction between housing wealth and developments in the Irish economy is of critical importance. The interaction between the performance of the housing sector and the performance of the overall economy has long been a topic of interest for researchers, see for example the discussion in McQuinn et al. (2008). In this paper we provide an overview of one aspect of the relationship between housing wealth and aggregate demand: home equity withdrawal. We summarise the level of borrowing that occurred, the terms and conditions of such borrowing and the reasons for home equity withdrawal. The latter is important as it provides important information on the link between home equity withdrawal and consumption. We place the evidence on Irish home equity withdrawal trends in the context of the extensive international literature in this area and use this to draw some high level conclusions as to the relationship between home equity withdrawal and domestic demand. During the housing boom of the last decade an increasing number of homeowners withdrew housing equity on the back of rapidly rising asset values. Some of this borrowing was used to fund housing investment, either in the same property or in other properties, and some was used for non-housing consumption. This paper builds on the literature in this area by using micro data to analyse home equity withdrawal trends in recent years. The potential use of home equity withdrawal to part-finance an additional property is of particular interest in the case of Ireland where intergenerational transfers of housing wealth (parents funding their children's house deposits) and buy-to-let property investment became an increasingly common feature of the Irish property market during the property boom. By analysing data from the peak years of the property boom, our paper builds on earlier work by Hogan and O'Sullivan (2007), which looks at the relationship between housing wealth and consumption up to 2005. Hogan and O'Sullivan conclude that "until very recently, the dramatic rise in personal income has explained all of the increase in consumption and the marginal propensity to consume out of housing wealth is essentially zero. " (p. 47). We show that housing equity withdrawal represented a substantial proportion of mortgage borrowing during the property boom, such that one-third of all mortgage draw-downs were "top-ups" on existing mortgages. We explore the reasons for equity withdrawal and, on the based of self-reported loan-purpose data, observe that the bulk of equity withdrawal was re-invested in housing. We show that following the bursting of the housing bubble there has been a substantial drop in the propensity for home-owners to withdraw equity. The remainder of this paper is outlined as follows. Section 2 provides some background on the interaction between the Irish housing market and the real economy. Section 3 describes the data and presents some stylised facts relating to housing equity withdrawal in Ireland. Section 4 discusses Irish trends in the context of the international literature on housing equity withdrawal on the real economy. Section 5 concludes. 2. HOUSING MARKET DEVELOPMENTS AND THE REAL ECONOMY As noted in Gerlach (2012), changes in the fortunes of the housing market can have far-reaching consequences for the health of the economy. The closer the linkages between the housing market and economic activity, the more far reaching these effects. …