Neighbourhood-level variation in the risk of private credit default: A driver of urban residential segregation?

Credit default is a dramatic consequence of disadvantageous private financial decisions. Using regression methods which eliminate spatial autocorrelation at the level of 1 km2 grids and further identification problems, we observe considerable and reinforcing residential segregation between households facing payment difficulty and more solvent households. Two findings give reasons for concern. First, data from North Rhine-Westphalia reveals that a high local risk of credit default coincides with a lower share of children taking the highest German secondary school track (Gymnasium). Since birth rates are currently high in these (inner city) areas, the outlook on educational attainment for many pupils is bleak. Second, hedonic price estimations using microdata on housing offers find that local agglomeration of households facing credit default provokes significant (detrimental) neighbourhood effects on housing markets. Segregation is thus unlikely to diminish, which implies increased efforts should be made to overcome unfavourable neighbourhood effects in various fields of policy, especially education.