Housing Wealth Isn’t Wealth

Abstract

A fall in house prices due to a change in fundamental value redistributes wealth from those long housing (for whom the fundamental value of the house they own exceeds the present discounted value of their planned future consumption of housing services) to those short housing. In a closed economy representative agent model (the special case when the birth rate is zero, of the Yaari-Blanchard OLG model used in the paper), there is no pure wealth effect on consumption from a change in house prices if this represents a change in their fundamental value. When the birth rate is positive, higher fundamental house prices driven by the housing demand of future generations will boost current consumption.There is a pure wealth effect on consumption from a change in house prices even in the representative agent model, if this reflects a change in the speculative bubble component of house prices.Two other channels through which a fall in house prices can affect aggregate consumption are (1) redistribution effects if the marginal propensity to spend out of wealth differs between those long housing (the old, say) and those short housing (the young, say) and (2) collateral or credit effects due to the collateralisability of housing wealth and the non-collateralisability of human wealth. A decline in house prices reduces the scope for mortgage equity withdrawal. For given sequences of future after-tax labour income and interest rates, a fall in house prices will then depress consumption in the short run while boosting it in the long run. JEL E2, E3, E5, E6, G1

How did household indebtedness hamper consumption during the recession? Evidence from micro data

“…It is possible to control for the differences in consumption changes between individuals with different financial assets. The dataset lacks information on the real estate of the individual, but it has been argued by Buiter (2010) that changes in home values do not change the wealth of households and it is posited by Attanasio et al (2009) that the wealth effect on consumption may actually capture the effect of common underlying factors which are controlled for by the time fixed effects in the model.…”

House Price Growth, Collateral Constraints and the Accumulation of Homeowner Debt in the United States

“…Furthermore,Buiter (2008) is amongst several authors who argues that generalised housing wealth effects from house price increases are likely to be small or insignificant.…”

Equity wealth effects: fundamental or bubble-driven?

“…Permanent, and not temporary, changes in wealth do matter for consumption (Lettau and Ludvigson, 2004) and changes in the fundamental component of equity prices can be assumed to be more related to permanent changes in wealth, whereas changes in the bubble component are more of a temporary nature. In contrast, Buiter (2008) theoretically argues that there is only a wealth effect on consumption from changes in house prices if they reflect changes in the bubble component of house prices.…”