| Summary: | From around the mid-1990s, and until the onset of the current financial crisis, housing equity withdrawal had been rising sharply in the UK. This was accompanied by a general downward trend in the aggregate household saving ratio. According to the permanent income/life cycle theory of consumption, households should save or borrow in order to smooth consumption over the course of their lives. In practice, households often save and borrow simultaneously, particularly when borrowing involves mortgage debt. The aim of this thesis is to explore what factors might help explain this behaviour, from both a theoretical and an empirical perspective. The model developed incorporates income, house price and interest rate uncertainty, and allows for capital market imperfections. Therefore empirical estimation requires the specification of suitable processes of how households form their expectations.
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