Disentangling the effect of household debt on consumption

We estimate the relationship between household mortgage debt and consumption for the period 2006 to 2015. Using Dutch administrative data, we find that the average consumption of households with high mortgage debt prior to the financial crisis has decreased much more during the crisis than that of other households. We also find that the willingness or ability among households to use new mortgage debt to finance one-off high consumption decreased during the crisis. On the macro-level, the drop in Dutch consumption during the financial crisis is predominantly driven by households who were already in high debt. They are responsible for a 7 percentage points drop in macro-consumption at the worst point of the financial crisis. Within this group, the drop in consumption of households with negative home equity explains 6 percentage point of the total drop in macro-consumption.