Andreas Fuster and Basit Zafar write (note: WTP – “willingness to pay”),

we find that on average, WTP increases by about 15 percent when households can make a down payment as low as 5 percent of the purchase price instead of having to put down 20 percent. However, this average masks large differences in sensitivity across households. In fact, almost half the respondents do not change their WTP at all when the required down payment is lowered. On the other hand, many respondents increase their WTP very strongly in the second scenario with the lower down payment requirement. This is particularly true for respondents who are current renters (and often relatively less wealthy): their WTP on average increases by more than 40 percent. They also tend to choose lower down payment fractions than current owners; for instance, 59 percent of renters but only 36 percent of owners choose a down payment fraction of 10 percent or lower.

As Mark Thoma says, this is not a surprise. The question is whether this means that government policies to encourage lower down payments are a good idea. I think not, since it encourages a lot of speculative purchases of houses and makes house prices more volatile.

If you want periods in which people over-pay for housing to alternate with periods of retrenchment, then letting people buy with little or no money down is the way to go. If you want sensible policies to build wealth among households below the top of the income ladder, then you would subsidize saving. But that idea goes nowhere with the real estate lobby, which dictates policy in this area.