How Does Mortgage Debt Affect Household Consumption? Micro Evidence from China

The high growth rate of mortgage debt in various emerging and developed economies has captured headlines following the financial crisis. In this article, we investigate how mortgage debt impacts household consumption behavior and various components of household consumption. Utilizing comprehensive household survey data from China, we show that households with a mortgage consume a higher portion of income than households without a mortgage. This is in line with the argument that having a mortgage reduces the uncertainty that the household faces regarding how much to save each month in order to be able to own a house, and this reduced uncertainty leads to lower monthly savings for the purpose of buying a house. We also find that among households with a mortgage, those who spend a larger share of their income on mortgage payments spend less on consumption, reflecting the crowding out effect of mortgage payments on household consumption. Furthermore, we show that a government policy of decreasing the maximum loan-to-value ratio has a significant impact on households' consumption. The article offers the first evidence of the impact of growing mortgage debt on the consumption behavior of households, and will have implications for government policies that encourage mortgage borrowing.