The effect of declining house prices on household savings. A theoretical and empirical study of the Dutch case

In this paper I analyse the e ect of a decrease in house prices on the savings of households. A simpli ed version of the life cycle model with housing predicts that homeowners will compensate an unexpected decrease in home equity by increasing their savings. In addition, the model predicts that the effect becomes stronger as the age of the household increases. To test these hypotheses I use data from the Dutch Central Bank Household Survey (DHS) for the period between 2003 and 2013. This sample period allows me to exploit the variation in house prices associated with the last years of the housing boom and the 2008 bust. The results of the econometric analysis show that homeowners do not react neither to self-reported measures of house price changes nor to their own expectations about future house prices. However, I do find a significant effect, with the expected sign, when the observed market price change in thesecond hand housing market is employed. The latter result implies that households are more sensitive to general market conditions than to the value they assign to their own house. The effect becomes stronger with age and it appears to be asymmetric, meaning that households react to negative changes much more than they react to positive changes in house prices.

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