Housing wealth, marital stability and labor supply: an intertemporal analysis

We study how house price shocks affect marital stability and household labor supply. We address this question using a dynamic collective household model with limited commitment. We find that positive house price shocks increase the divorce rate, and that leverage ratios such as loan-to-income (LTI) and loan-to- value (LTV) determine the transmission of house price shocks on divorce. Given its importance, we then analyze a tightening of the credit market through the LTI-limit. We show that neglecting the divorce and intra-household bargaining channels significantly biases the individual welfare effects of such policies.