## _wp06162

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---

### I. Introduction: scope and questions
- Key observation: U.S. household saving rate has been on a declining trend since the mid-1980s and turned negative in 2005.
- Framing questions:
  - Does the negative U.S. household saving rate reflect reality or is it a statistical artifact?
  - What role has financial liberalization played in reducing U.S. saving and fostering home equity withdrawal (HEW)?
  - To what degree have increasing housing wealth and HEW been responsible for the decline in U.S. saving?
- Comparative approach: compares U.S. experience with Australia, Canada, and the United Kingdom.
- Notable quote: “It’s like installing an ATM on the side of your house.”

### II. Measurement issues and adjustments — Have saving rates really fallen?
- Definition: household saving rate = household net saving / personal disposable income (flow measure reported in national accounts).
- Key conceptual points:
  - Flow measure versus stock (change in household net wealth); valuation changes can cause divergence.
  - Statistical agencies argue flow measure is appropriate for funds available to finance new investment; valuation changes do not create “real wealth.”
- Specific measurement issues and adjustments:
  - Inflation effects:
    - Inflation mechanically raises interest receipts and disposable income, spuriously raising measured saving rates.
    - Adjustment method: subtract product of inflation rate and stock of fixed-income assets from disposable income and net saving; add product of inflation rate and stock of liabilities to net saving.
    - Empirical note: inflation adjustment lowers U.S. saving rate in the high-inflation 1970s–1980s period but is insufficient to explain the bulk of the decline.
  - Asset-price inflation and capital gains taxes:
    - Reinsdorf (2004): capital gains taxes equaled 1.65 percent of U.S. household disposable income in 2000; their increase contributed 0.5 percentage point to a 5.9 percent decline in the saving rate between 1992 and 2001.
  - Imputed rent and residential capital consumption:
    - House price increases raise imputed rents and consumption of fixed capital, lowering the measured saving rate even if behavior unchanged.
    - Excluding imputed rent or residential capital consumption raises measured U.S. saving rate by a stable amount; these adjustments do not explain the trend decline.
  - Other corrections (splitting personal income between households and nonprofits; excluding defined-benefit pensions) have little impact (Reinsdorf, 2004).
- Conclusion: measurement factors magnify the decline, but the bulk of the decline in the flow saving rate is real.
- Cross-country note: saving rates have declined in other “Anglo-Saxon” financial markets (Australia, Canada, United Kingdom); New Zealand also saw a substantial decline.

### III. Box 1 — Defining Home Equity Withdrawal (HEW): definition, mechanisms, and trends
- Definition and components:
  - HEW = transactions whereby homeowners collectively reduce the equity in their homes.
  - Sources of HEW include: mortgages exceeding house value; negative amortization; remortgage/refinance with higher principal; second mortgages or home equity loans; increasing mortgage indebtedness on moving into similar-valued house; trading down while maintaining secured debt; selling a house and moving to rental accommodation.
  - Equity injections include: down payments; amortization/additional mortgage payments; remortgage with lower principal; reducing mortgage indebtedness when moving to similar-valued house; purchasing second homes with cash; financing home improvements other than through a mortgage.
  - Net HEW = difference between withdrawal and injection. When home improvements are financed through secured borrowing, there should be no impact on net HEW.
- Financial liberalization, innovation, and mechanisms increasing HEW:
  - HEW is strongly linked to housing transactions and housing equity increases from price appreciation.
  - HEW is positively correlated with mortgage market completeness.
  - Liberalization lowers barriers to HEW by:
    - Reducing refinancing transaction costs: average fees and points on a 30-year fixed rate mortgage in the United States fell from 2.5 percent in 1984 to 0.6 percent in 2005.
      - Result: higher refinancing and churn rates; average life of a mortgage in the United Kingdom fell from seven years in 1995 to three in 2004.
    - Introducing flexible mortgage terms (offset mortgages; negative amortization options). A significant proportion of U.S. mortgages extended in 2004–2005 contain negative amortization options.
    - Increasing access to second mortgages and home equity loans (HELs and HELOCs): issuance of U.S. HEL and HELOC asset-backed securities rose from $61 billion in 1999 to $515 billion in 2005.
    - Increasing ability to access home equity in retirement: United Kingdom sales of home reversion mortgages and home income plans roughly £1¼ billion p.a. in 2003–2005.
- Cross-country HEW and saving trends (summary):
  - United States:
    - From 1961 until the mid-1990s, HEW was fairly small relative to household income and moved roughly with the saving rate.
    - In the last ten years to the study date, pronounced growth in HEW coincided with a decline in household saving.
    - Flows into net financial assets tended to rise after the IT bubble collapse, supporting view that HEW financed portfolio rebalancing (repaying nonsecured debt and moving wealth into financial assets).
  - Canada:
    - Has not witnessed substantial HEW. Decline in household saving reflected diminishing flows into financial assets rather than HEW.
  - Australia and United Kingdom:
    - Both featured substantial HEW in the short periods available.
    - Australia: HEW increased while saving rate declined since the late 1970s, though not always synchronously.
    - United Kingdom: HEW and saving rate generally moved in opposite directions since the late 1980s.
    - Both experienced sharp reduction in house price appreciation recently, associated with some decline in HEW and stabilization of the saving rate.
- Survey evidence on uses of HEW:
  - Australia (2004 survey): 72 percent of HEW extracted via property transactions; two-thirds used to acquire financial assets or pay off debts; household expenditure accounted for 18 percent.
  - United Kingdom (2003 survey): majority of HEW arises from housing transactions; most common motive was to save or pay off other debts; expenditure significant among those using second mortgages or refinancing, mainly for home improvement.
  - United States (Canner, Dynan, and Passmore, 2002; 2001–2002H1):
    - 45 percent of those who refinanced extracted equity, estimated at $132 billion.
    - Of this HEW: 35 percent used on home improvements; 26 percent for repayment of debt; 21 percent for acquisition of real assets; 16 percent to finance consumer expenditure.
  - Cross-country synthesis: majority of HEW arises through housing transactions rather than increasing mortgage debt; HEW primarily used to acquire financial assets, repay more expensive debts, or improve housing stock; usually less than 20 percent of HEW is used to finance consumption. Home improvement spending often leads to no net effect on HEW when financed through secured borrowing.

### IV. Financial innovation, mortgage-market indicators, and expected effects on saving and HEW
- Mechanisms:
  - Easier borrowing relaxes buffer-stock saving motives and facilitates consumption smoothing.
  - Reduced mortgage and refinancing transaction costs via competition and brokers.
  - Securitization expands investor capital access and can reduce mortgage costs by improving lenders’ capital management.
  - Advances in credit scoring and internet-enabled information reduce default risk premia and search costs, extending credit to more marginal borrowers.
- Empirical indicators of mortgage-market innovation:
  - U.S. mortgage securitization expanded rapidly in the 1980s and 1990s; MBS now finance around 60 percent of the U.S. mortgage stock.
  - Australia: MBS share increased from around 3 percent of mortgages outstanding in the mid-1990s to around 22 percent in 2006.
  - Canada: MBS share grew from 4 percent to around 16 percent in the same period.
  - United Kingdom: MBS first issued in late 1980s and accounted for 12 percent of the mortgage stock by end-2004.
- Anticipated effects:
  - Greater access to credit reduces need for large down payments and facilitates HEW.
  - Lower transaction/search costs and broader refinancing options raise consumption and house prices, reducing the saving ratio.
  - Financial innovation should increase marginal propensity to consume out of income, increase housing’s investment value as liquidity rises, and reduce consumption volatility—partly via HEW.
  - Potential adverse effect: securitization could increase credit rationing for borrowers not meeting pool criteria.
- Supporting findings:
  - Frankel (2006): credit scores of mortgages backing non-agency MBS declined markedly between 2000 and 2005; share of ‘prime’ mortgages backing U.S. non-agency MBS issuance fell from around 50 to 25 percent since 1995; subprime loans now constitute 9 percent of U.S. securitized mortgage debt and financed 15 percent of home sales in 2005 (JP Morgan, 2006).
  - Boone, Girouard, and Wanner (2001): financial deregulation and innovation raised marginal propensity to consume in Canada, the United Kingdom and the United States.

### V. Econometric analysis: model, estimation, and key results
- Model framework:
  - Error-correction specification with household saving rate (s), HEW as a percentage of disposable income (hew), household net worth ratio (nw), short-term real interest rate (r), CPI inflation (π), and time trend (t).
  - Variables have a unit root in level, stationary in first differences; cointegrating relationship found.
  - Annual data; estimation periods depend on housing wealth data availability.
- Country-specific long-run and short-run findings (selected coefficients and interpretations):
  - United States (1963–2005):
    - Long-run coefficients (when HEW included):
      - Net worth: -0.02 (0.004)***.
      - Real interest rate: 0.38 (0.08)***.
      - Inflation rate: 0.39 (0.07)***.
      - Trend: -0.13 (0.02)***.
      - HEW: -0.11 (0.09) [not statistically significant].
      - Error-correction term: 0.85 (0.16)***.
    - Short-run: a ten percentage point increase in HEW-to-disposable-income associated with a temporary 1½–2 percentage point decline in the saving rate (coefficient different from zero at the 12 percent probability level).
    - Attribution: increase in household net worth explains 1¾ percentage points of a 6 percentage point decline in the personal saving rate since 1993; HEW contributes about ¼ percentage points. For 2000–2005, HEW explains ¼ percentage points of a 2¾ percentage point decline.
  - Canada (1968–2005):
    - Long-run net worth coefficients: -0.03 (0.02)* and -0.06 (0.02)*** across specifications.
    - Real interest rate: 0.78 (0.18)*** and 0.67 (0.25)**.
    - Inflation: 1.21 (0.21)*** and 1.15 (0.28)***.
    - HEW: 1.02 (0.46)** (positive; likely spurious given small HEW scale).
    - Error-correction term: 0.40 (0.10)*** and 0.30 (0.09)***.
  - Australia (1979–2005):
    - Net worth: -0.05 (0.03)* and -0.07 (0.01)*** across specs.
    - HEW: -0.44 (0.53) [not significant].
    - Error-correction term: 0.38 (0.29).
    - Short-run HEW coefficients similar magnitude to U.S. but not significant.
  - United Kingdom (1989–2005):
    - Net worth: -0.02 (0.03) and -0.02 (0.04) [not significant].
    - HEW: -0.18 (0.55) [not significant].
    - Error-correction term: 0.32 (0.37) and 0.26 (0.30).
    - Short-run: ∆(HEW) = -0.51 (0.28)** and -0.47 (0.22)** (statistically significant; effect close to one-half).
- Panel regression (unbalanced panel, 132 observations):
  - Long-run:
    - Net worth: -0.03 (0.02)*.
    - Nominal interest rate: 0.81 (0.32)** and 0.87 (0.36)** in alternate specification.
    - HEW: -0.36 (0.37) [not significant].
    - Error-correction term: 0.13 (0.05)*** and 0.11 (0.05)**.
  - Short-run:
    - ∆(HEW): -0.20 (0.09)** and -0.18 (0.09)** (around 20 cents on the dollar short-run effect).
- Econometric interpretation:
  - Net worth rises → saving rate declines in the long run (≈ three cents per dollar in panel).
  - HEW matters for saving in the short run (around -0.20 coefficient) but not in the long run.
  - Long-run coefficient on nominal interest rate ≈ 0.9 in panel regressions.
  - Trend variable significant in U.S. regressions, consistent with financial innovation lowering precautionary saving and increasing consumption smoothing.

### VI. Recent experiences and illustrative scenarios
- Observed changes since 2000:
  - Link between real house prices and consumption has weakened dramatically in Australia, United Kingdom, Canada, and United States (ten-year rolling correlation).
  - When house price growth decelerated in Australia and United Kingdom, HEW declined somewhat and saving rate rebound was relatively small (quarterly data).
- Illustrative scenario for the United States:
  - A reduction in the HEW ratio from current 9 percent to its long-run average of 1 percent in a year would temporarily boost the saving rate by about 1¼ percentage points.
  - Decline in growth of HELs and cash-out refinancing may have at least as large and possibly more persistent impact on housing investment via home improvement spending.

### VII. Conclusions — substantive findings and implications
- Core findings:
  - U.S. households react to increases in net worth and lower real interest rates by reducing their saving rate.
  - HEW has a negative impact on household saving in the short run, but the size of the effect is limited and typically temporary (short-run effect around -0.20; U.K. short-run effect larger in some specifications).
  - Financial innovation and liberalization (captured by a trend) have reduced precautionary saving and increased households’ ability to smooth consumption, lowering saving volatility.
  - Even substantial reductions in HEW (for example, from 9 percent to 1 percent of disposable income within a year) would produce a temporary but limited rise in the saving rate (about 1¼ percentage points).

*Source: _wp06162 - Box 1. Defining Home Equity Withdrawal (excerpts).*

### References..............................................................................................................

### _wp06162 - References

### I. Introduction: scope and questions
- Key observation: U.S. household saving rate has been on a declining trend since the mid-1980s and turned negative in 2005.
- Framing questions addressed:
  - Does the negative U.S. household saving rate reflect reality or is it a statistical artifact?
  - What role has financial liberalization played in reducing U.S. saving and fostering home equity withdrawal (HEW)?
  - To what degree have increasing housing wealth and HEW been responsible for the decline in U.S. saving?
- Comparative approach: the paper compares the U.S. experience with Australia, Canada, and the United Kingdom to assess interactions between housing wealth, saving, and mortgage-market innovation.
- Notable quote setting the issue: “It’s like installing an ATM on the side of your house.”

### II. Have saving rates really fallen? — measurement issues and adjustments
- Main definition: household saving rate = household net saving / personal disposable income (the flow measure reported in national accounts).
- Conceptual issues:
  - Flow measure versus stock (change in household net wealth) measure; valuation changes can cause divergence between the two.
  - Statistical agencies’ rationale: flow measure appropriate for funds available to finance new investment; valuation changes do not create “real wealth.”
  - Examples showing limitations of the flow measure: dividend flows vs. retained earnings; valuation-driven increases in net financial claims on foreigners.
- Inflation and fixed nominal assets:
  - Inflation mechanically raises interest receipts and disposable income; this can spuriously raise measured saving rates.
  - Adjustment method: subtract product of inflation rate and stock of fixed-income assets from disposable income and net saving; add product of inflation rate and stock of liabilities to net saving.
  - Empirical note: the inflation adjustment lowers the U.S. saving rate in the high-inflation 1970s–1980s period but is insufficient to explain the bulk of the decline in the saving rate.
- Technical concerns related to asset-price inflation:
  - Capital gains taxes: Reinsdorf (2004) estimate — capital gains taxes equaled 1.65 percent of U.S. household disposable income in 2000, and their increase contributed 0.5 percentage point to a 5.9 percent decline in the saving rate between 1992 and 2001.
  - House price increases raise imputed rents and consumption of fixed capital, lowering the measured saving rate even if household behavior is unchanged.
  - Adjustments that exclude imputed rent or residential capital consumption raise the measured U.S. saving rate by a stable amount, implying these adjustments do not explain the trend decline.
- Other corrections (e.g., splitting personal income between households and nonprofit institutions; excluding defined-benefit pensions) have little impact on the measured fall in saving (Reinsdorf, 2004).
- Conclusion: while measurement factors magnify the decline, the bulk of the decline in the flow saving rate is real.
- Cross-country note: saving rates have also declined in other “Anglo-Saxon” financial markets (Australia, Canada, United Kingdom); New Zealand has also seen a substantial decline.

### III. Likely impact of financial innovation and liberalization on HEW and saving
- Mechanisms by which liberalization and innovation affect households:
  - Easier access to borrowing relaxes buffer-stock saving motives and allows households to smooth consumption more readily.
  - Reduction in mortgage and refinancing transaction costs due to increased competition (new entrants, foreign competitors, new technology) and mortgage brokers.
  - Securitization expands access to investor capital and can reduce mortgage costs by improving lenders’ capital management.
  - Advances in credit scoring and internet-enabled information reduce default risk premia and search costs, extending credit to more marginal borrowers.
- Empirical indicators of mortgage-market innovation:
  - U.S. mortgage securitization expanded rapidly in the 1980s and 1990s; mortgage-backed securities (MBS) now finance around 60 percent of the U.S. mortgage stock.
  - Australia: MBS share increased from around 3 percent of mortgages outstanding in the mid-1990s to around 22 percent in 2006.
  - Canada: MBS share grew from 4 percent to around 16 percent in the same period.
  - United Kingdom: MBS first issued in late 1980s and accounted for 12 percent of the mortgage stock by the end of 2004.
- Anticipated effects on saving, consumption, and house prices:
  - Greater access to credit reduces need for large down payments and facilitates borrowing against existing collateral (HEW), increasing accessibility of housing equity.
  - Lower transaction/search costs and broader refinancing options raise consumption and house prices simultaneously, thereby reducing the saving ratio.
  - Financial innovation should increase the marginal propensity to consume out of income, increase housing’s investment value as liquidity rises, and reduce volatility of consumption—partly via HEW.
- Potential adverse effect: securitization could increase credit rationing for borrowers whose characteristics do not meet securitization pool criteria.
- Supporting literature and findings:
  - Frankel (2006): credit scores of mortgages backing non-agency MBS declined markedly between 2000 and 2005; share of ‘prime’ mortgages backing U.S. non-agency MBS issuance fell from around 50 to 25 percent since 1995; subprime loans now constitute 9 percent of U.S. securitized mortgage debt and financed 15 percent of home sales in 2005 (JP Morgan, 2006).
  - Boone, Girouard, and Wanner (2001): financial deregulation and innovation raised the marginal propensity to consume in Canada, the United Kingdom and the United States.

*Source: _wp06162 - References (excerpts).*

### Box 1. Defining Home Equity Withdrawal

### Box 1. Defining Home Equity Withdrawal

### Definition and components of HEW
- Home equity withdrawal (HEW) = transactions whereby homeowners collectively reduce the equity in their homes.
- HEW can arise from housing transactions, additional borrowing, or a combination.
- HEW rises when homeowners:
  - Take out a mortgage with a value in excess of that of the house;
  - Exercise negative amortization options, thereby increasing their debt;
  - Remortgage or refinance their existing mortgage with a higher principal;
  - Take out a second mortgage or home equity loan;
  - Increase their mortgage indebtedness when moving into a new house of similar value;
  - Trade down to a lower-value house when they have no mortgage or while maintaining their level of secured debt;
  - Sell a house, repaying any mortgage, to move into rental accommodation or realize a bequest.
- Households inject equity when they:
  - Make a down payment on a first-time purchase;
  - Make amortization and additional payments on a mortgage or home equity loan;
  - Remortgage, or refinance their existing mortgage, with a lower principal;
  - Reduce their mortgage indebtedness when moving into a house of similar value;
  - Purchase second homes and investment properties with cash;
  - Finance home improvements other than through a mortgage.
- Net HEW = difference between withdrawal and injection. When home improvements are financed through secured borrowing, there should be no impact on net HEW.

### Financial liberalization, innovation, and mechanisms increasing HEW
- HEW is strongly linked to housing transactions and housing equity increases from price appreciation.
- HEW is positively correlated with mortgage market completeness.
- Financial liberalization and innovation lower barriers to HEW by:
  - Reducing delay and transactions costs of refinancing (example: average fees and points on a 30-year fixed rate mortgage in the United States fell from 2.5 percent in 1984 to 0.6 percent in 2005).
    - Result: higher refinancing and churn rates; average life of a mortgage in the United Kingdom fell from seven years in 1995 to three in 2004.
  - Introducing flexible mortgage terms (offset mortgages; negative amortization options). A significant proportion of U.S. mortgages extended in 2004–2005 contain negative amortization options.
  - Increasing access to second mortgages and home equity loans (HELs and HELOCs). Issuance of U.S. HEL and HELOC asset-backed securities rose from $61 billion in 1999 to $515 billion in 2005.
  - Increasing ability to access home equity in retirement (home equity release products). In the United Kingdom, roughly £1¼ billion p.a. of home reversion mortgages and home income plans were sold in 2003–2005.

### Cross-country trends in HEW and household saving
- United States:
  - From 1961 until the mid-1990s, HEW was fairly small relative to household income and moved roughly with the saving rate. In the last ten years (to the date of the study) pronounced growth in HEW coincided with a decline in household saving.
  - Flows into net financial assets tended to rise after the collapse of the IT bubble, supporting the view that HEW financed portfolio rebalancing (repaying nonsecured debt and moving wealth into financial assets).
- Canada:
  - Has not witnessed substantial HEW. Recent home equity injection picked up, possibly related to a housing boom in western Canada.
  - The decline in household saving reflected diminishing flows into financial assets rather than HEW.
- Australia and United Kingdom:
  - Both featured substantial HEW in the short periods available.
  - Australia: HEW has increased while the saving rate declined since the late 1970s, though not always synchronously.
  - United Kingdom: HEW and the saving rate have generally moved in opposite directions since the late 1980s.
  - Both countries experienced a sharp reduction in house price appreciation recently, associated with some decline in HEW and stabilization of the saving rate.
- Figure and data notes:
  - The ratio of unsecured credit to total household debt shows movement across countries (Australia, Canada, United States, United Kingdom) for 1989–2005 (percent).

### Survey evidence on uses of HEW
- Australia (2004 survey): 72 percent of HEW extracted via property transactions; two-thirds used to acquire financial assets or pay off debts; household expenditure accounted for 18 percent.
- United Kingdom (2003 survey): Majority of HEW arises from housing transactions; most commonly cited motive was to save or pay off other debts; expenditure significant among those using second mortgages or refinancing, mainly for home improvement.
- United States (Canner, Dynan, and Passmore, 2002; 2001–2002H1):
  - 45 percent of those who refinanced extracted equity, estimated at $132 billion.
  - Of this HEW: 35 percent used on home improvements; 26 percent for repayment of debt; 21 percent for acquisition of real assets; 16 percent to finance consumer expenditure.
- Cross-country survey synthesis: majority of HEW arises through housing transactions rather than increasing mortgage debt; HEW is primarily used to acquire financial assets, repay more expensive debts, or improve housing stock. Usually less than 20 percent of HEW is used to finance consumption. Home improvement spending often leads to no net effect on HEW when financed through secured borrowing.

### Econometric analysis: model and general findings
- Model specification (error-correction framework) includes: household saving rate (s), HEW as a percentage of disposable income (hew), household net worth ratio (nw), short-term real interest rate (r), CPI inflation (π), and time trend (t). General form shown in equation (1).
- Variables have a unit root in level and are stationary in first differences; cointegrating relationship found.
- Annual data used; estimation periods determined by housing wealth data availability.

### Key econometric results (country-specific and panel)
- United States (1963–2005; Table 1):
  - Long-run relationship coefficients (when HEW included):
    - Net worth: -0.02 (standard error 0.004)***.
    - Real interest rate: 0.38 (0.08)***.
    - Inflation rate: 0.39 (0.07)***.
    - Trend: -0.13 (0.02)***.
    - HEW: -0.11 (0.09) [not statistically significant].
    - Error-correction term: 0.85 (0.16)***.
  - Short-run: A ten percentage point increase in HEW-to-disposable-income is associated with a temporary 1½–2 percentage point decline in the saving rate (coefficient different from zero at the 12 percent probability level).
  - Attribution: An increase in household net worth explains 1¾ percentage points of a 6 percentage point decline in the personal saving rate since 1993; HEW contributes about ¼ percentage points. For 2000–2005, HEW explains ¼ percentage points of a 2¾ percentage point decline in the saving rate.
- Canada (1968–2005; Table 2):
  - Long-run relationship coefficients:
    - Net worth: -0.03 (0.02)* and -0.06 (0.02)*** (specifications).
    - Real interest rate: 0.78 (0.18)*** and 0.67 (0.25)**.
    - Inflation rate: 1.21 (0.21)*** and 1.15 (0.28)***.
    - HEW: 1.02 (0.46)** (positive, interpreted as likely spurious given small HEW scale).
    - Error-correction term: 0.40 (0.10)*** and 0.30 (0.09)***.
- Australia (1979–2005; Table 3):
  - Long-run:
    - Net worth: -0.05 (0.03)* and -0.07 (0.01)***.
    - HEW: -0.44 (0.53) [not significant].
    - Error-correction term: 0.38 (0.29).
  - Short-run HEW coefficients similar magnitude to U.S. but not significant.
- United Kingdom (1989–2005; Table 4):
  - Long-run:
    - Net worth: -0.02 (0.03) and -0.02 (0.04) [not significant].
    - HEW: -0.18 (0.55) [not significant].
    - Error-correction term: 0.32 (0.37) and 0.26 (0.30).
  - Short-run: ∆(HEW) = -0.51 (0.28)** and -0.47 (0.22)** (statistically significant; effect close to one-half).
- Panel regression (unbalanced panel with 132 observations; Table 5):
  - Long-run:
    - Net worth: -0.03 (0.02)*.
    - Nominal interest rate: 0.81 (0.32)** and 0.87 (0.36)** when alternative specification used.
    - HEW: -0.36 (0.37) [not significant].
    - Error-correction term: 0.13 (0.05)*** and 0.11 (0.05)**.
  - Short-run:
    - ∆(HEW): -0.20 (0.09)** and -0.18 (0.09)** (around 20 cents on the dollar short-run effect).
  - Interpretation: HEW matters for saving in the short run (around -0.20 coefficient) but not in the long run. Long-run negative coefficient on net worth ≈ three cents per dollar. Long-run coefficient on nominal interest rate ≈ 0.9.
- General econometric interpretation:
  - Net worth rises → saving rate declines (long run).
  - HEW has a negative short-run impact on saving, limited in size and typically temporary.
  - Trend variable significant in U.S. regressions, consistent with financial innovation lowering saving by increasing access to financial products.

### Recent experiences (Australia and United Kingdom) and implications for the United States
- Since 2000, link between real house prices and consumption appears to have weakened dramatically in Australia, United Kingdom, Canada, and United States (ten-year rolling correlation).
- Around house price deceleration in Australia and United Kingdom, HEW declined somewhat and saving rate rebound was relatively small (quarterly data).
- Implication: Changes in HEW have limited, short-term effect on saving; United States likely to see a recovery in saving rate if housing growth, HEW, and financial conditions tighten, but the rise is likely to be limited.
- Illustrative scenario: a reduction in the HEW ratio from the current 9 percent to its long-run average of 1 percent in a year would temporarily boost the saving rate by about 1¼ percentage points, broadly consistent with recent experiences in Australia and the United Kingdom.
- Note: Decline in growth of HELs and cash-out refinancing may have at least as large and possibly more persistent impact on housing investment via home improvement spending.

### Conclusions
- U.S. households react to increases in net worth and lower real interest rates by reducing their saving rate.
- HEW has a negative impact on household saving in the short run, but the size of the effect is limited and typically temporary.
- Financial innovation and liberalization, represented by a trend, have reduced precautionary saving and increased households’ ability to smooth consumption, lowering saving volatility.
- Even substantial reductions in HEW (e.g., 9 percent to 1 percent of disposable income within a year) would produce a temporary but limited rise in the saving rate (about 1¼ percentage points).

*Source: _wp06162 - Box 1. Defining Home Equity Withdrawal*

### References

### _wp06162 - References

### References

- Bank for International Settlements (BIS), 2006, “Housing Finance in the Global Financial Market,” Committee for Global Financial Stability Papers No. 26, January (Basel).
- Bank of England, 2006, Mortgage Equity Withdrawal: Q4 2005. Available on the Web at: http://www.bankofengland.co.uk/statistics/mew/2005.htm.
- Benito, A., and J. Power, 2004, “Housing Equity and Consumption: Insights from the Survey of English Housing,” Bank of England Quarterly Bulletin (Autumn), pp. 302–09.
- Bennett, P., R. Peach, and S. Persistani, 2001, “Structural Change in the Mortgage Market and the Propensity to Refinance,” Journal of Money, Credit and Banking (November), pp. 955–76.
- Boone, L., N. Girouard, and I. Wanner, 2001, “Financial Market Liberalization, Wealth and Consumption,” OECD Economics Department Working Paper No. 308 (Paris: Organization for Economic Cooperation and Development).
- Canner, G., K. Dynan, and W. Passmore, 2002, “Mortgage Refinancing in 2001 and Early 2002,” Federal Reserve Bulletin (December), pp. 469–81.
- Catte, P., N. Girouard, R. Price, and C. Andre, 2004, “Housing Markets, Wealth and the Business Cycle,” OECD Economics Department Working Paper No. 394, (Paris: Organization for Economic Cooperation and Development).
- Council of Mortgage Lenders (CML), 2005, “UK Mortgage Funding,” Housing Finance, (February).
- Frankel, A., 2006, “Prime or Not So Prime? An Exploration of US Housing Finance in the New Century,” BIS Quarterly Review, March, 67–78.
- Galí, Jordi, 1990, “Finite Horizons, Life-Cycle Savings, and Time-Series Evidence on Consumption” Journal of Monetary Economics, Vol. 26, pp. 433–52.
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*Source: _wp06162 - References*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp06162.pdf_