IFS Working Paper (W16/12)

Housing equity, saving and debt dynamics over the Great Recession

Date: 02 August 2016
Publisher: IFS
JEL classification: D14, D91, E21, R20
DOI: 10.1920/wp.ifs.2016.1612

This paper uses the large and heterogeneous house price shocks in Denmark from 2006-2009 to provide new evidence on the contested determinants of the correlation between house prices and saving. Crucially, to compare the savings behaviour of home-owners who experienced di fferent house price shocks but similar shocks to income expectations, we exploit the structure of the wage setting process in the Danish public sector. We fi nd strong evidence of a causal link between changes in house prices and saving for young and old home-owners, both through a direct wealth eff ect and through housing equity serving as collateral or precautionary wealth.