Riding the Housing Wave: Home Equity Withdrawal and Consumer Debt Composition
What this paper finds — and why it matters
Layer 1 — Overview
Research Question
This paper investigates how rising house prices affect the composition of household debt portfolios in Sweden during 2010–2014. Specifically, the authors ask whether homeowners who experience housing wealth gains use home equity withdrawals to substitute relatively expensive unsecured consumer (non-mortgage) debt with cheaper collateralized mortgage debt — a form of debt re-optimization — and what individual and policy factors drive this behavior.
Data and Methodology
The study uses a monthly individual-level panel dataset sourced from Upplysningscentralen (UC), the Swedish credit bureau, covering approximately 4.8 million individuals (62 percent of the Swedish adult population) from July 2010 to July 2014. The UC data captures approximately 80 percent of total household credit volume and 97 percent of household mortgage loans. Parish-level house price indices come from Valueguard, and municipality-level education data come from Statistics Sweden. The empirical analysis draws on a random sample of approximately 150,000 individuals, of whom 81,667 (81 percent) are classified as homeowners — defined as individuals holding a mortgage throughout the entire sample period.
The primary identification strategy uses renters as a control group for homeowners in a difference-in-differences (DiD) framework, exploiting the variation in local (parish-level) house price growth. Because Sweden’s rental market is heavily regulated and uses a queuing allocation system, the rent-versus-own decision is largely exogenous to individual wealth, making renters a credible counterfactual for homeowners. The authors also use two instrumental variables to address endogeneity of house price growth: (1) historical house price volatility at the municipal level from 1981–2005 (the “Palmer instrument”), and (2) a “building-friendly” instrument measured as the share of municipal planning appeals overruled by county authorities, derived from Sweden’s 2013 National Board of Housing survey. A difference-in-difference-in-differences (DDD) approach is employed to examine the role of DTI constraints and financial literacy. Home equity withdrawals are identified as increases in outstanding mortgage balances of at least SEK 20,000, after excluding cases where the equity was used to purchase a new property.
Main Findings
Total debt and mortgage growth: A one percentage point increase in local house prices is associated with an increase of SEK 959.1 in total household debt for homeowners relative to renters, driven primarily by mortgage growth. This effect is robust to instrumental variable estimation.
Debt re-optimization — unsecured loans: Conditional on withdrawing home equity in month t, homeowners reduce their outstanding unsecured consumer loan balances by 53.5 percent in the following month (t+1). This is large relative to the U.S. benchmark of 16.7 percent reported in Bhutta and Keys (2016). The average reduction in unsecured loan balances across all equity withdrawers is SEK 9,624 per withdrawal event, while credit card debt declines by only SEK 73.3 — an economically negligible amount. For equity withdrawers who had pre-existing unsecured loan balances and actively repaid them, outstanding unsecured loans fell by SEK 55,040 — nearly six times the full-sample average. For this subsample, 17.7 percent of the total withdrawn home equity was applied to unsecured loan repayment (versus 2.98 percent for the full sample of equity withdrawers).
Credit card debt: The effect of equity withdrawal on credit card balances is not statistically significant. This reflects the institutional feature that credit cards in Sweden are used primarily as payment instruments within a 30–45 day interest-free grace period, not as a credit facility. Swedish credit card outstanding balances average only 16 percent of a debtor’s monthly disposable income, compared to 201 percent in the U.S.
Heterogeneity by homeowner type: The debt re-optimization finding is specific to equity withdrawers. House traders increase non-mortgage debt alongside mortgage debt. Amortizers show neither effect at meaningful scale. The substitution between unsecured loans and mortgage debt is not observed for non-withdrawing homeowners.
DTI and financial literacy: The debt re-optimization effect is strongest for borrowers with above-median DTI ratios residing in municipalities with above-median education levels (used as a proxy for financial literacy). Borrowers in this high-DTI, high-literacy group paid down approximately SEK 10,000 more in unsecured loans after a home equity withdrawal than high-DTI borrowers in low-literacy areas. A larger fraction of their withdrawn equity was also directed toward unsecured loan repayment.
Macroprudential policy: The introduction of an 85 percent LTV cap in October 2010 is associated with an increase in non-mortgage debt, particularly unsecured consumer loans, by both existing equity withdrawers and new mortgage borrowers. For new mortgagors entering after the LTV cap, the ratio of unsecured loans to mortgage debt increased by 1.68 percentage points, consistent with borrowers using unsecured loans to fund the required 15 percent downpayment. The debt re-optimization behavior itself (i.e., paying back unsecured loans with withdrawn equity) was found to persist both before and after the LTV cap introduction, with no statistically significant difference between regimes.
Interest rates: Both the probability and the size of home equity withdrawal are negatively correlated with the mortgage rate and positively correlated with the spread between the unsecured loan rate and the mortgage rate. During the sample period, mortgage rates averaged between 2.5 and 3 percent, while unsecured loan rates were on average two to three times higher.
Scope Conditions
The results are specific to Sweden during a housing boom period (2010–2014), under interest-only floating-rate mortgages with full recourse, and in the context of a tightly regulated rental market that makes the renter vs. owner distinction largely exogenous. The re-optimizing behavior requires actively rising house prices to generate the equity needed for withdrawal; the authors note this strategy is fragile if house prices were to decline. Swedish households increased their total debt levels even while re-optimizing its composition, raising financial stability concerns.
Layer 2 — Q&A
Q1: What exactly is “home equity withdrawal” in the Swedish institutional context, and how does it differ from the U.S.? A: In Sweden, home equity withdrawal occurs exclusively by increasing the existing outstanding mortgage balance against an updated home valuation; there are no HELOCs, home equity loans, or cash-out refinancing products as in the U.S. Households must pass a credit check and comply with the 85 percent LTV limit (post-October 2010). Some banks require a minimum withdrawal of SEK 100,000. Fixed transaction costs include a bank administration fee (around SEK 700 for apartment owners) and a fixed fee to the building association (around SEK 750), making the process cheap but not costless.
Q2: How do the authors identify home equity withdrawal events in the data? A: An equity withdrawal event for individual i in month t is defined as a positive change in outstanding mortgage balance greater than SEK 20,000 (approximately the average monthly disposable income), conditional on no simultaneous change in residential address, property type, or acquisition of a second property. This threshold is applied to avoid measurement error from minor rounding or bank adjustments. After applying all exclusion criteria, the authors identify 46,499 equity withdrawal events over the sample period.
Q3: What is the identification strategy for isolating the causal effect of house prices on debt portfolios? A: The primary identification uses renters as a control group in a DiD framework. Because Sweden’s heavily regulated rental market (with queuing systems and rents far below market rates) makes the rent-vs-own decision largely exogenous to individual wealth, renters experience the same local economic conditions as homeowners but cannot access the equity-based financing channel. The key identifying assumption is that unobserved local economic shocks — which may jointly drive house prices and credit demand — affect renters and homeowners similarly. Two IVs are used as robustness checks: historical municipal house price volatility (1981–2005) and a “building-friendly” regulation index.
Q4: What is the first-stage strength of the Palmer instrumental variable? A: The estimated coefficient on the historical house price volatility instrument in the first-stage IV regression is 0.00022 and is statistically significant at the 1 percent level. The first-stage F-statistic is 38.41, which exceeds conventional weak-instrument thresholds, confirming that historical volatility is a strong predictor of current house price growth across municipalities.
Q5: Why is credit card debt not reduced by equity withdrawals in Sweden, even though it carries higher interest rates than unsecured loans? A: Credit cards in Sweden function predominantly as payment instruments within a 30–45 day interest-free grace period rather than as actual credit facilities. Average outstanding credit card balances amount to only 16 percent of debtors’ monthly disposable income (versus 201 percent in the U.S. during the same period), and balances are typically repaid in full at month-end. Because cardholders are not accruing significant interest on their balances, there is no financial incentive to extinguish credit card debt using withdrawn home equity.
Q6: How is the 2.98 percent figure for equity used in debt repayment to be interpreted? A: Across all home equity withdrawers (including those who have no pre-existing unsecured loans), the average share of the total amount withdrawn that is applied to unsecured loan repayment in the following month is 2.98 percent. This low average reflects that the majority of homeowners do not hold outstanding unsecured consumer loans and therefore have no debt to repay. When the sample is restricted to equity withdrawers who both held outstanding unsecured loans before the withdrawal and actively repaid some portion in the following month, the repayment share rises to 17.7 percent of the withdrawn amount.
Q7: What is the DDD specification used to identify the roles of DTI and financial literacy, and what do the triple interaction terms reveal? A: The DDD specification interacts the equity withdrawal indicator with a high-DTI dummy (above-median DTI at the individual level in the current month) and a high-financial-literacy dummy (municipality’s share of post-secondary educated residents above the national median in that year). The triple interaction term (EquityWithdrawal × HighDTI × HighLit) is negatively significant at approximately −SEK 9,913 to −9,966 (in thousands, i.e., around −SEK 10,000) in the unsecured loan repayment regression. This implies that, conditional on withdrawing equity, borrowers with both high DTI and high financial literacy municipality background reduced their unsecured loans by roughly SEK 10,000 more than high-DTI borrowers in low-literacy areas.
Q8: How does the introduction of the 85 percent LTV cap in October 2010 affect non-mortgage debt? A: Comparing a three-month window before and after October 2010, the authors find that: (a) before the LTV cap, changes in household debt did not respond significantly to house price growth for any debt type; (b) after the LTV cap, all debt types — including unsecured consumer loans — increased significantly in areas with higher cumulative house price growth. The interaction term between house price growth and the post-LTV dummy is positively significant for non-mortgage debt, driven by unsecured loans. For new mortgage borrowers, the ratio of unsecured loans to mortgage debt increased by 1.68 percentage points after the LTV cap, consistent with constrained borrowers using blanco (unsecured) loans to fund the mandatory 15 percent downpayment.
Q9: Does the LTV cap affect the debt re-optimization behavior (i.e., the use of withdrawn equity to repay unsecured loans)? A: The authors find that equity withdrawers reduce unsecured loans both before and after the LTV cap introduction. The interaction terms between the LTV dummy and equity withdrawal indicators (both dummy and size) are not statistically significant, indicating that the debt re-optimization behavior per se — the channel of using withdrawn equity to pay down non-mortgage debt — was not materially altered by the macroprudential tightening. The authors caution that the very short pre-cap period (only three months of data from July to September 2010) limits statistical power for this comparison.
Q10: What is the role of interest rate spreads in driving equity withdrawal decisions? A: Both the probability of withdrawing equity and the size of the withdrawal are negatively correlated with the prevailing mortgage rate and positively correlated with the spread between the unsecured loan rate and the mortgage rate. This implies that equity withdrawal is more common and larger in magnitude when mortgages are cheaper or when the relative cost premium on unsecured lending is higher — consistent with the debt re-optimization motive. Results for the interest rate analysis are reported in Appendix B.2.
Q11: How do the results differ across homeowner subgroups (equity withdrawers, house traders, amortizers)? A: Among equity withdrawers: mortgage increases and unsecured loan decreases are both statistically significant (debt re-optimization). Among house traders: mortgage increases significantly and non-mortgage debt also increases (no substitution — they borrow across all categories to finance property purchases). Among amortizers: changes in both mortgage and non-mortgage debt are smaller in magnitude and primarily reflect active principal repayment rather than refinancing activity. The substitution between unsecured and mortgage debt is thus exclusive to equity withdrawers.
Q12: What is the overall change in Swedish house prices and aggregate debt during the sample period? A: The house price index rose by 20 percent between July 2010 and July 2014, with particularly strong appreciation after January 2012 following a mild dip in the second half of 2011. Over the same period, aggregate mortgage balances of homeowners increased by 16 percent. Aggregate non-mortgage debt also increased, though from a much smaller base. In the cross-sectional regression, a one percentage point increase in house prices is associated with an SEK 926.7 increase in total individual debt (4 percent of average house value of SEK 21,500 per percentage point).
Q13: What are the robustness checks and do they alter the conclusions? A: The following robustness checks are reported: (1) redefining equity withdrawers as those who withdrew exactly once (Tables A4–A6); (2) restricting equity withdrawers to those withdrawing SEK 20,000–100,000 to exclude potential house traders; (3) using alternative house price growth windows of 12, 24, and 48 months (Tables A7–A9); (4) using the “building-friendly” regulation IV (Tables A2–A3); (5) supplementary time-series panel regressions (Appendix B.1). All robustness checks yield qualitatively consistent results, with the substitution from unsecured loans to mortgages preserved across specifications.
Q14: What are the financial stability implications the authors identify? A: Despite the debt re-optimization behavior, total indebtedness among Swedish equity withdrawers does not decline — they increase their mortgage balances more than they reduce unsecured loans. Swedish average household DTI is approximately double that of the U.S. (OECD, 2022). The authors note that if house prices were to fall, homeowners relying on equity withdrawal for debt restructuring would lose access to this financing channel and face the full cost of high-interest unsecured debt. Additionally, the circumvention of the LTV cap through unsecured loan substitution raises financial stability concerns because it concentrates households in more expensive, unprotected debt.
Key Concepts
Home Equity Withdrawal (Sweden-specific): The act of increasing an existing outstanding mortgage balance against a revalued home, which is the only channel for equity extraction in Sweden. Unlike the U.S., there are no HELOCs, home equity loans, or cash-out refinancing products. Subject to the 85 percent LTV cap introduced in October 2010 and a minimum threshold (SEK 100,000 at some banks).
Debt Re-optimization: The behavior by which homeowners substitute relatively expensive unsecured consumer debt with cheaper collateralized mortgage debt during a housing boom, using the proceeds of home equity withdrawal to repay unsecured loans. In the paper’s usage, this implies a deliberate, financially sophisticated portfolio adjustment — not merely passive debt accumulation.
Blanco Loans (Unsecured Consumer Loans): Unsecured personal loans in Sweden (referred to as “blanco” loans in Swedish). These carry interest rates historically two to three times higher than mortgage rates. In the Swedish context, they are used both as consumer finance and — especially after the 85 percent LTV cap — as a source of downpayment funds. They are the primary non-mortgage debt instrument that equity withdrawers pay down.
Loan-to-Value (LTV) Cap: The macroprudential regulation introduced by the Swedish Financial Supervisory Authority in October 2010, limiting mortgage debt (including home equity withdrawals) to 85 percent of the property’s market value. This applied both to new mortgage originations and to existing mortgagors increasing their mortgage balance. In the paper, this is treated as an exogenous policy event against which behavioral responses are measured.
Financial Literacy Proxy (Municipal Education Level): Because individual-level financial literacy data are unavailable, the paper uses the share of a municipality’s residents with post-secondary education in a given year as a municipality-level proxy for financial literacy. Municipalities above the national median in this share are classified as high-literacy areas. The classification can change year to year.
Debt-to-Income (DTI) Ratio: The ratio of an individual’s total outstanding debt to annual disposable income, used in the paper as a measure of financial constraint. A borrower is classified as “high DTI” if their DTI exceeds the cross-sectional median for all borrowers in that month. High-DTI borrowers in the paper’s sample tend to be younger, have larger mortgages, and have more unsecured loan balances.
Interest-Only Floating-Rate Mortgage: The predominant Swedish mortgage structure during the sample period. Most mortgages are effectively three-month floating-rate contracts with no amortization requirement (until June 2016), making Swedish borrowers more sensitive to short-term interest rate movements than borrowers in fixed-rate amortizing mortgage systems. This institutional feature means that increases in home equity during the sample period derived almost entirely from house price appreciation rather than principal repayment.