Negative Equity, Household Mobility and Job Matching – what do we know?

negative-equity-300x262One of the arguments that many (including yrs trly) has adduced for negative equity in residential housing being a problem is that it may well reduce mobility. Economists talk about matching – jobs exist and people exist who could fill them but can they be matched and what are the impediments to that. Negative Equity if it reduces mobility will act as an impediment to matching. That it has an effect on consumption seems reasonable and is I suggest agreed. But the issue of its effect on mobility is rather more complicated, from the research. People who face negative equity may be unwilling or unable to move for reasons of equity issues – the sheer financial constraint of seeking in effect an additional loan or because of the well known propensity for people to show loss aversion and unwillingness to sell an asset that has declined.

Screen shot 2013-08-18 at 11.00.57First lets look at the Irish situation. Recent central bank analyses suggest that as of 2010Q4 some 31% of mortgages are in negative equity, with this concentrated in loans originated at the peak of the bubble.  These account for some 47% by value of loans. This is a lot. Even allowing for the fact that only about 40% of households have a mortgage we still face a situation where between 10-15% of all households have loans on their homes which are greater than the value of these homes. And house prices have fallen since 2010q4 by approx 25% suggesting that we could be looking at the high teens as a percentage of all Irish homes in negative equity.

20138181221439937LRM03_122536We also face a massive unemployment crisis. One part of the solution is for people to move where the jobs are. Despite this being a small island that may well involve movement of a family home. A historically proven Irish approach is to emigrate. Again this may well involve a desire to sell and repurchase or otherwise use funds in the new locale. Neither of these are easy to say the least if there is negative equity, as in effect one is seeking an additional loan in a credit crunch. As to the extent to which Irish homeowners exhibit degrees of loss aversion, again we are in the dark. We can assume that they do as every other group and asset does so.

So might this negative equity deter mobility? Again, we simply do not know. Despite the excellent work of the Central Bank on some aspects of the housing market we are in the dark on this issue as on so many others.

From the UK in the 1990s we see very strong evidence that yes, negative equity does deter mobility (forrest and Kennet 1996, Henley 1998).

This ‘lock in’ effect is also found strongly in the USA in Chan (2001), Engelhardt (2003) , Chen and Rosenthal (2008) , Ferreira  et al (2010, 2011) , Andersson and Mayock (2012), Modestino and Dennet (2012), Andersson and Mayock (2012) and Sasser and Dennet (2012). These papers suggest that negative equity may reduce mobility propensity by between 25-40%. This is large. 

An OECD analysis by Junankar (2011) suggests that this is an issue across all countries.  No social science finding is ever unanimous and this is no exception : Coulson and Greico (2012) ,  Schulhofer-Wohl (2011) and Valetta (2013)  suggest that there is limited or no effect. Nonetheless there is a preponderance of evidence for the ‘lock in’ effect in the USA, and the UK.

so : the evidence from the USA and the UK suggests a problem. We can only very cautiously infer but if the evidence maps over to here then we too have a problem. Some solution to negative equity in so far as it deters mobility will have to be a part of the new architecture of the irish economy.

  • Andersson, Fredrik Daniel and Mayock, Tom, How Does Home Equity Affect Mobility? (November 2, 2012). Available at SSRN: or
  • Chan, S. (2001), “Spatial Lock-In: Do Falling House Prices Constrain Residential Mobility?,” Journal of Urban Economics, 49(3), 567-586.
  • Chen, Yong and Stuart S. Rosenthal, “Local Amenities and Life-Cycle Migration: Do People Move for Jobs or Fun?,” Journal of Urban Economics, 2008, 64 (3), 519–557.
  • Coulson, N.E., Grieco, P.L.E. Mobility and mortgages: Evidence from the PSID (2013) Regional Science and Urban Economics, 43 (1), pp. 1-7.
  • Engelhardt, G.V. (2003), “Nominal Loss Aversion, Housing Equity Constraints, and Household Mobility: Evidence from the United States,” Journal of Urban Economics, 53(1), 171-195.
  • Ferreira, F., Gyourko, J., Tracy, J. Housing busts and household mobility (2010) Journal of Urban Economics, 68 (1), pp. 34-45.
  • Ferreira, Fernando V., Gyourko, Joseph E. and Tracy, Joseph S., Housing Busts and Household Mobility: An Update (November 15, 2011). FRB of New York Staff Report No. 526. Available at SSRN: or
  • Forrest, R., Kennett, T. Coping strategies, housing careers and households with negative equity (1996) Journal of Social Policy, 25 (3), pp. 369-394.
  • Henley, A. Residential mobility, housing equity and the labour market (1998) Economic Journal, 108 (447), pp. 414-427.
  • Junankar, P. N. Raja, The Global Economic Crisis: Long-Term Unemployment in the OECD. IZA Discussion Paper No. 6057.  (November 1, 2011) Available at SSRN:
  • Modestino, A.S., Dennett, J. Are American homeowners locked into their houses? The impact of housing market conditions on state-to-state migration (2012) Regional Science and Urban Economics, in press
  • Sasser, Alicia and Dennett, Julia, Are American Homeowners Locked into Their Houses? The Impact of Housing Market Conditions on State-to-State Migration (February 8, 2012). FRB of Boston Working Paper No. 12-1. Available at SSRN: or
  • Schulhofer-Wohl, Sam, Negative Equity Does Not Reduce Homeowners’ Mobility (January 2011). NBER Working Paper No. w16701. Available at SSRN:

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