Income Shocks, Mortgage Repayment Risk and Financial Distress Among UK Households

This paper examines the prevalence of mortgage arrears in the U.K using the British Household Panel Survey (BHPS). The majority of reported problems occur in the first few years after purchase. Episodes of unemployment, long-term sickness or relationship breakdown all predict repayment difficulties, as well as measures of leverage and income gearing at the point of origination. Using proxy measures for unemployment risk, ill-health risk and separation risk at the time of purchase, constructed from a variety of instruments, repayment difficulties are shown to be strongly correlated with ex ante repayment risk. This result raises questions about the efficiency of the mortgage lending process and the possibility that a significant proportion of mortgage arrears and defaults could be prevented by improved screening of repayment risk at the time of application.

Racial Disparities in Credit Constraints in the Great Recession: Evidence from the UK

This paper investigates racial disparities in household credit constraints using U.K. survey data. We find a widening disparity in the proportion of racial minority households reporting they face credit constraints compared with non-minority households over the period 2006-2009. By 2009 three times as many racial minority households faced credit constraints compared with White households. The difference in credit constraints across racial minority and non-minority households is not explained by a broad set of covariates. While crosssection variation in reported credit constraints might most likely reflect unobservables, we argue this time series variation is very unlikely to arise due to unobservables and is evidence of growing perceived disparity in credit access between racial groups over the period.credit constraints, race.

The Consumer Response to House Price Falls

Movements in house prices and consumer spending are closely correlated in many developed nations. Much debate exists on whether this relationship is in any way causal arising from either wealth effects or collateral effects. This paper uses a unique survey question on self-reported responses to house price falls to explain the relationship between house price movements and consumer spending among households in the United Kingdom. 30% of households report they would cut back their spending as a direct response to house price falls. Econometric analysis suggests that among homeowners this response is driven by collateral effects. However, perhaps surprisingly, one third of those reporting they would cut back their consumption are renters. We argue this reaction is also driven by credit availability: both renters and homeowners who report they face credit constraints are more likely to cut back their consumption when house prices decrease, suggesting they perceive house price movements as indicative of aggregate financial market conditions.consumer spending, housing wealth, wealth effects, collateral effects.

Debt and Depression: Evidence on Casual Links and Social Stigma Effects

Using individual-level panel data, this paper examines the relationship between problem debt and psychological health. Individuals exhibiting problem debt, by either subjective or objective measures, also exhibit much worse psychological health, by either subjective or objective measures. However, selection into problem debt on the basis of poor psychological health accounts for much of this difference. The causality between problem debt and psychological health may be two-way. Local house price movements exogenous to individual households are used to establish the causality from problem mortgage debt to psychological health. In addition, the social stigmas effects of problem debt are investigated using local bankruptcy and repossession rates as indicators of the local prevalence of problem debt in a reference group population. Results indicate there is a sizeable causal link between problem debt and psychological health and that reference group effects are also significant in magnitude.debt, over-indebtedness, depression, reference group effects.

The Social Dimension to the Consumer Bankruptcy Decision

Personally knowing someone who has been bankrupt substantially increases the likelihood of an individual reporting they would consider filing for bankruptcy. This paper provides new evidence on the role of social effects in the personal bankruptcy decision using individual-level survey data from a representative sample of households in the United Kingdom. Respondents who reported they personally knew someone who had previously been bankrupt are more likely to consider bankruptcy as a viable option for discharging their debts. By contrast, respondents from an ethnic minority group are much less likely to consider bankruptcy. Both effects are substantial in magnitude, larger than the impact of demographic characteristics and point to a strong social element to the consumer bankruptcy decisionconsumer bankruptcy, social effects, personal insolvency.

Income Uncertainty, House Price Uncertainty and the Transition Into Home Ownership in the United Kingdom

Using household panel data, this paper examines the impact of income uncertainty and house price uncertainty on home ownership in the United Kingdom. The existing literature based on cross-sectional studies finds a negative relationship between income uncertainty and home ownership. This paper utilises data on transitions into home ownership and exogenous variation in income uncertainty, avoiding the endogeneity of income to home ownership status. It also conditions the empirical estimates on a measure of house price volatility utilising a local-level house price index to control house price uncertainty, which might also discourage home ownership. Results show a strong role for income uncertainty in lowering the likelihood of house purchase, but no statistically significant role for house price uncertainty.Home ownership, income uncertainty, house price uncertainty.

Housing Wealth, Liquidity Constraints and Self-Employment

This paper investigates the existence of liquidity constraints facing entrepreneurs in the United Kingdom. Using a household-level panel data set, entry to selfemployment is shown to be a function of household net worth. We use inheritances and unanticipated movements in house prices as instruments for shocks to liquidity. Results indicate that inheritances are a poor instrument for liquidity constraints because both past and future inheritances predict entry to self-employment. House prices shocks are a more plausible instrument because self-employed households disproportionately re-mortgage, but our results again indicate little evidence of house price shocks unbinding liquidity constraints facing the would-be self-employed.Self-employment, liquidity, windfalls.

Financial Literacy ad Indebtedness: New Evidence for UK Consumers

We utilise questions concerning individual ‘debt literacy’ incorporated into market research data on households’ unsecured debt positions to examine the association between consumer credit and individual financial literacy. We examine the relationship between individual responses to debt literacy questions and household net worth, consumer credit use and over-indebtedness. We find that financially illiterate households have lower net worth, use higher cost credit and are more likely to report credit arrears or difficulty paying their debts. However, financially literate households are more likely to co-hold liquid savings and revolving consumer credit, suggesting that the co-holding might arise as a result of rational financial behaviour. We consider the potential endogeneity of financial literacy.

House Price Volatility and Household Indebtedness in the United States and the United Kingdom

Recent household financial models predict that collateral-constrained households are more likely to increase debt-financed spending in response to rising house values. We augment this model to consider the use of unsecured debt such as credit cards. Using household panel data, we consider microeconomic evidence on the behaviour of households in the United States and the United Kingdom in response to rising house prices. The evidence confirms that previously collateral-constrained households in both countries increase their indebtedness more than unconstrained households as house prices rose. But whereas United Kingdom households used house price gains primarily to refinance existing unsecured debt, United States households were more likely to increase their total indebtedness. Our results imply that on average households in the United States extract as much as 10% of their housing equity gains to fund consumption spending, and suggest that housing wealth effects predominantly arise through unbinding liquidity constraints.Housing wealth; collateral; unsecured debt; consumer spending.

Housing Wealth and Household Indebtedness: Is there a Household 'Financial Accelerator'?

The 'financial accelerator' model when applied to households states that shocks to household balance sheets (primarily changes in house prices) amplify fluctuations in consumer spending by tightening or relaxing collateral constraints on borrowing. We construct an alternative model where households also have access to unsecured debt, and examine the effect of shocks to house prices on debt-financed consumption in this augmented setting. Our alternative model reduces the amplitude of fluctuations in debt-financed consumer spending arising from fluctuations in household asset values. The paper tests the applicability of the two models using panel data for the United Kingdom that allow us to measure collateral constraints, changes in asset values and financial indebtedness at the household level.Collateral, consumer spending, Housing wealth, unsecured debt.