Consumption and Habit Formation when Time Horizon is Finite

This paper provides a closed-form solution under labour uncertainty for optimal consumption and the value function in a finite horizon life-cycle model with habit persistence.habit formation, life-cycle consumption, precautionary saving

Mortgage Refinancing and Consumption Smoothing

This paper analyses the optimal refinancing decision of an agent whose only asset in the portfolio is the house where she lives in the context of a life-cycle model. The mortgage is modelled as an adjustable rate contract covering the remaining life of te house owner. Thus, refinancing concerns only the size of the mortgage, which can be adjusted in any period subject to a constraint on the amount that can be borrowed: the value of the new mortgage cannot exceed the latest realised price. The paper solves the model analytically and then numerically calibrates the refinancing decision.mortgages, refinancing,consumption smoothing

Housing Debt and Consumption

The interaction between housing wealth, the financial portfolio of the consumer and consumption is a live issue. Life cycle models with closed form solutions under uncertainty are hard to find. In this paper we find analytical solutions for the effects of house price uncertainty and employment risk on consumption, savings and mortgage finance in a finite horizon life-cycle model. In each period the consumer decides whether to withdraw equity from the house or not, subject to a transaction cost and a constraint on the maximum mortgage loan to house value ratio. Despite risk aversion we findthat, if borrowing is allowed in the financial asset, the prime portfolio effect is the spread between the interest rate and the mortgage rate. House price uncertainty has an ambiguous effect on consumption, which depends on the interest rate differential and house price expectations since future house prices affect future remortgage possibilities. If unsecured debt is not possible, we find that the possibility of future liquidity constraints can reduce mortgage borrowing below the maximum possible.precautionary savings, employment risk, mortgages, housing

Residential Mobility of the European Elderly

With the ageing of the European population, the housing choices of the elderly will have consequences on the whole housing market. In this paper we use data from the first two waves of the Survey of Health, Ageing and Retirement in Europe (SHARE) to analyse the residential mobility decisions of the elderly and the factors influencing them in eleven European countries.housing, ageing, residential mobility, housing policy

Housing Debt, Employment Risk and Consumption

We consider the interaction between the risk of unemployment, random house prices, consumption and savings. A critical decision is that of refinancing house purchase, up to 100% mortgages are possible. There is also a fixed transaction cost of refinancing. In a CARA framework we derive the value function for a finite horizon, the policy of refinance and the consumption function. Either there is a maximum mortgage or a zero mortgage depending on interest rates, house prices and the transaction cost. The consumption function is linear in wealth and in the uncertainty caused by employment status and house prices of the future. Since there is either 100% or 0% equity withdrawal, consumption jumps when there is refinancing.Precautionary savings; employment risk; mortgages; housing

The long-term effects of experienced macroeconomic shocks on wealth

This paper examines the long-term effects of experienced macro-economic shocks – defined as multi-year peak-to-trough GDP declines of at least 10 percent – on the wealth distribution, portfolio allocation, and risk attitudes of older individuals in Europe. We show that individuals who have experienced more economic depression episodes have lower wealth in absolute terms, a lower probability to invest in risky assets, and display higher risk aversion. When analysing early investment decisions, we find that individuals hit by a depression substitute risky investments with investment in housing, and that these early choices shape wealth in the long-term