The Consumption Response to Borrowing Constraints in the Mortgage Market

Résumé

We show that easing homebuyer liquidity constraints significantly boosts consumption through its impact on housing market activity. For identification, we exploit a large UK mortgage market stimulus program and employ difference-in-differences analyses using administrative mortgage data linked to transaction-level expenditure data. Our findings show that easing liquidity constraints led to a 14.3% increase in aggregate home purchases, driven entirely by previously constrained homebuyers. This increase in home buying activity resulted in a 3.8% rise in consumption per standard deviation of exposure to the easing, primarily due to higher home-related and non-durable consumption of new homebuyers, as well as local demand effects. Notably, previously constrained homebuyers exhibited significantly higher consumption increases following their home purchase.