Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 452: Riding the Housing Wave: Home Equity Withdrawal and Consumer Debt Composition

Anna Grodecka-Messi (), Jieying Li () and Xin Zhang ()
Additional contact information
Anna Grodecka-Messi: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Jieying Li: Financial Stability Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Xin Zhang: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: Using a monthly panel dataset of individuals’ debt, we show that house price changes can ex plain 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 We present direct evidence that homeowners re-optimize their debt structure by using parts of withdrawn home equity to pay down comparatively expensive non-mortgage debt during a housing boom.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.

Keywords: Personal Debt Management; Home Equity Extraction; Household Debt; Housing; Financial Literacy; Macroprudential Policy.

JEL-codes: D14; G21; G51; G53; R31

Language: English

82 pages, July 1, 2025

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