Banking

The consumption response to borrowing constraints in the mortgage market

Assessing the impact of Help-to-Buy 

Given the above points, it is likely for this type of intervention to have a significant impact on several dimensions of the housing market. However, it is not straightforward to quantify the effect as many other factors can impact the demand for housing as well. To do this, a counterfactual is needed: an estimate of what would have happened in the absence of the program.

To create this counterfactual, we exploit the fact that different parts of the United Kingdom were differently exposed to HTB. Households with limited ability to save for a down payment are not randomly spread across the United Kingdom but tend to be concentrated in specific areas. These are areas where local housing supply is better suited in terms of affordability, housing type, and certain local amenities, such as pubs and restaurants, schools, or parks, which are particularly appealing to these buyers who are relatively young. These local housing market characteristics tend to change only slowly over time. As a result, areas where households would like to purchase a home with a 5% down payment remain relatively stable over time.

To exploit this geographic variation in exposure to HTB, we construct an HTB exposure measure using detailed data on all regulated mortgages originated in the United Kingdom from the Financial Conduct Authority. We define exposure to HTB as the proportion of households within a local authority district that bought their home with a 5% down payment in the period before the financial crisis (2005–07). As is clear from Figure 2, exposure varies significantly across the country. In our analysis, we compare housing market activity and household consumption in low- relative to high-exposure areas before and after HTB came into effect, while controlling for a wide range of regional macroeconomic and housing market conditions. Low-exposure areas can function as a control group as buyers in these areas are unlikely to react to HTB.

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Figure 2: Geographical variation in exposure to Help-to-Buy

Source : blogs.worldbank.org

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