Precaution and liquidity in the demand for housing

We exploit cross‐sectional mortgage data to investigate the importance of liquidity constraints and a precautionary motive in the demand for housing. Households that are not liquidity constrained consume housing services essentially as the life cycle hypothesis suggests but with a significant precautionary component. Households that are liquidity constrained, in terms of not meeting standard loan‐to‐value or payments‐to‐income constraints, are similar to unconstrained households in most respects, including the precautionary motive, but they respond somewhat less to fluctuations in their lifetime income ‐ suggesting some influence of bank‐induced liquidity constraints. We additionally find, however, that banks enforce liquidity constraints only weakly.

Precaution and liquidity in the demand for housing Journal Articles