Danish Study Quantifies Impact of House Prices on Consumption

(Bloomberg) -- The fact that people tend to borrow and spend more when property prices rise is unlikely to surprise many in Denmark, a country in which refinancing mortgages is a national pastime.

However, the central bank has now taken a closer look at the phenomenon, and the results provide some interesting fodder for policy makers.

According to a new study, a 1 percent increase in house prices will lead to a 0.2 percent rise in the rate of “extraction” (additional borrowing against equity). And “for each extra krone of home equity extracted, approximately one-third will be spent financing current expenses such as consumption and home improvements.”

Danish Study Quantifies Impact of House Prices on Consumption

The study, which corroborates similar findings in the U.K., suggests that increases in house prices do have “important effects on the real economy through the reduction of credit constraints.”

For Helge Pedersen, chief economist at Nordea Bank Abp, it shows that “stability in the housing market is a decisive parameter for stability in the Danish economy.”

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