The Consumption Response to Borrowing Constraints in the Mortgage Market

joint with Belinda Tracey

We show that easing mortgage-market borrowing constraints stimulates consumption via a local multiplier effect. We document that a sudden relaxation of borrowing constraints, induced by a major UK mortgage-market intervention, positively affects both home purchases and consumption. Two mechanisms generate the observed local multiplier effect. First, there is a 14 percent increase in the volume of new home-buyers, each of whom spend an additional £3,200 on non-durable and home-related items in the year following their home purchase. Second, the rise in home-buyer spending boosts local economic activity, which subsequently brings about a broader increase in consumption. Our findings suggest that the local multiplier effect plays a significant role in explaining the co-movement between housing market activity and consumption