How do House Prices Affect Consumption? Evidence from Micro Data

Abstract

Housing is a major component of wealth. Since house prices fluctuate considerably over time, it is important to understand how these fluctuations affect households' consumption decisions. Rising house prices may stimulate consumption by increasing households' perceived wealth, or by relaxing borrowing constraints. This paper investigates the response of household consumption to house prices using UK micro data. We estimate the largest effect of house prices on consumption for older homeowners, and the smallest effect, insignificantly different from zero, for younger renters. This finding is consistent with heterogeneity in the wealth effect across these groups. It suggests that as the population ages and becomes more concentrated in the old homeowners group, aggregate consumption may become more responsive to house prices. In addition, we find that regional house prices affect regional consumption growth. Predictable changes in house prices are correlated with predictable changes in consumption, particularly for households that are more likely to be borrowing constrained, but this effect is driven by national rather than regional house prices and is important for renters as well as homeowners, suggesting that UK house prices are correlated with aggregate financial market conditions.

House Prices and Marital Stability

“…Bhatia, 1987;Engelhardt, 1996;Skinner, 1996;Disney, et al, 2003;Belsky and Prakken, 2004;Lehnart, 2004;Case, et al, 2005;Juster, et al, 2006;Morris, 2006;Campbell and Cocco, 2007;andBostic, et al, 2009, Mian andSufi, 2010). While findings vary, these papers tend to find a marginal propensity to consume out of housing wealth in the neighborhood of 0.06.…”

“…While findings vary, these papers tend to find a marginal propensity to consume out of housing wealth in the neighborhood of 0.06. Among these studies, Campbell and Cocco (2007) find that the elderly respond to shocks in housing wealth and working age individuals do not. Bostic et al (2009) estimate a small elasticity of consumption with respect to housing price shocks, but find larger effects for households that they identify as credit-constrained.…”

“…1 These dramatic changes in prices, illustrated in Figure 1, have led economists to renew their focus on the effect of housing wealth shocks on a number of outcomes, including consumption (e.g. Campbell and Cocco, 2007;Bostic, Gabriel and Painter, 2009), debt accumulation (e.g. Mian and Sufi, 2010), and labor supply (e.g.…”

A Theory of Housing Collateral, Consumption Insurance and Risk Premia

“…Actual risk-sharing patterns between US metropolitan areas, explored in Lustig and VanNieuwerburgh (2004a), lend support to the collateral mechanism, while Campbell and Cocco (2004) provide similar evidence from UK household data. This paper focuses on intertemporal prices rather than quantities.…”

Causality, real estate prices, and the current account

“…Engelhardt (1996) finds a low marginal propensity to consume out of real housing capital gains. In England, micro data show the effect of house prices on consumption increases with age and borrowing constraint, driven by national rather than regional house prices, suggesting that house prices are correlated with aggregate financial market conditions (Campbell and Cocco, 2007).…”