There is evidence from the United Kingdom that such a switch occurs when house prices fall. Apart from the heightened sensitivity of consumption, are there other risks that we have overlooked? In particular, are there risks to the lenders as well as to borrowers, and hence a possibility of some sort of financial crisis due to failure of financial institutions?
Obviously, if the shock was large enough, we could not rule this out, but my guess is that it is highly unlikely. Throughout our work on household debt, we have assumed that lending standards of financial institutions, as typified by maximum debtservice ratios, have not been relaxed. This might be an over-simplification but, if it is, it is not a large 6 one.