Monitoring Household Liquidity Constraints Across Europe : A Panel Approach

Excessive real estate credit is a major threat to financial stability. However, risk arising from household credit is difficult to monitor at an aggregate level. As household liquidity constraints play a key role, we propose a new indicator for the analysis of mortgage lending restrictions: The average marginal effect of household income on the probability of home ownership. Resorting to data from the European Union Statistics on Income and Living Conditions (EU-SILC), the preceding European Community Household Panel (ECHP) and the German Socio Economic Panel (SOEP), we conduct a comprehensive empirical investigation based on various panels for European countries between 1999 and 2010. We find significant differences in marginal effects across countries as well as across time. Most striking are low and weakening marginal effects during the run-up of the financial crisis of 2007 for countries such as Spain and the United Kingdom - countries severely affected by bursting real estate bubbles since 2008. On the one hand, our results demonstrate the potential usefulness of the new indicator within early warning approaches for real estate and financial crises. On the other hand, they highlight the problem of heterogeneous household liquidity constraints across Europe, particularly with regard to the common monetary policy within Eurozone countries