Consumption-Wealth Ratio and Housing Prices

Abstract

This paper shows, from the consumer budget constraint, that the consumption spending and the different components of total wealth, i.e. financial, housing and human wealths, are cointegrated and that deviations from the common trend cahy is a proxy for the consumption-wealth ratio that should predict expected returns on financial assets and housing. Using U.S postwar data, we provide empirical evidence in favor of the existence of a cointegration relationship with a structural break in the mid-eighties. Moreover, we show that until the beginning of 2000, consumption spending and housing wealth were dominated by permanent shocks. The main variable that adjusts to restore the long-run trend when a deviation occurs is the financial wealth and therefore it presents the main transitory variations in total wealth. However, over the last period 2000-2009, most of transitory shocks in total wealth are associated to fluctuations in the housing component of wealth rather than financial wealth. Besides, we found that a small fraction of transitory changes in wealth is associated with movements in consumption. These conclusions are in line with our empirical results on the ability of the cahy to predict expected asset and housing returns. Indeed, until the beginning of 2000, the proxy of the consumption-wealth ratio predicts expected asset returns and fails to explain future fluctuations in housing returns.

Designing scalable and stock-flow-consistent agent-based models: Policy scenarios and experiments on housing markets, monetary unions and interbank networks

“…Recent surveys hint that a 'healthy' debt to income ratio should be around one third of disposable income Anderson et al, 2014). This is also the most general rate which is used by banks at determining the allowable loan amount for a mortgage requests (Dubecq and Ghattassi, 2009;Borsch-Supan, 1994;Gharaie et al, 2012). Accordingly, we have estimated that households are able to use up to one third of their net disposable income to serve their mortgage payments.…”