Riding the Housing Wave: Home Equity Withdrawal and Consumer Debt Composition

Abstract Using a monthly panel data set of individuals' debt, we show that house price changes can explain a significant fraction of personal debt composition dynamics. We exploit the variation in local house price growth as shocks to homeowners' housing wealth to study the consequential adjustment of debt portfolio. We present direct evidence that homeowners reoptimize their debt structure by using parts of withdrawn home equity to pay down comparatively expensive nonmortgage debt during a housing boom. The effect is strongest for homeowners that have a high debt‐to‐income ratio and live in a municipality with a high literacy level. We find evidence that macroprudential policy and interest rates are important for consumer debt decisions.