The Impact of House Prices on Consumption in the UK: a New Perspective

Burrows, Vivien

doi:10.1111/ecca.12237

Cited by 25 publications

(18 citation statements)

References 44 publications

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“…There is now strong micro evidence that the effect of housing wealth on consumption, where it exists, is much more of a collateral effect than a wealth effect, see Browning et al (2013, Mian et al (2013, Windsor et al (2015), Mian and Sufi (2016) and Burrows (2017). The economics of this are further discussed in section VI below.…”

Section: (Iii) the Omission Of Shifting Credit Constraints Householdmentioning

confidence: 98%

The future of macroeconomics: macro theory and models at the Bank of England

Hendry

Muellbauer

2018

Oxford Review of Economic Policy

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The adoption as policy models by central banks of representative agent New Keynesian dynamic stochastic general equilibrium models has been widely criticised, including for their simplistic micro-foundations. At the Bank of England, the previous generation of policy models is seen in its 1999 medium-term macro model (MTMM). Instead of improving that model to correct its considerable flaws, many shared by other non-DSGE policy models such as the Federal Reserve's FRB/US, it was replaced in 2004 by the DSGE-based BEQM. Though this clearly failed during and after the global financial crisis, it was replaced in 2011 by the DSGE COMPASS, complemented by a 'suite of models'. We provide a general critique of DSGE models for explaining, forecasting and policy analyses at central banks, and suggest new directions for improving current empirical macroeconomic models based on empirical modelling broadly consistent with better theory, rather than seeking to impose simplistic and unrealistic theory.

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Section: (Iii) the Omission Of Shifting Credit Constraints Householdmentioning

confidence: 98%

The future of macroeconomics: macro theory and models at the Bank of England

Hendry

Muellbauer

2018

Oxford Review of Economic Policy

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“…They showed that the effect was different from that of financial wealth because housing is a consumption item as well as an asset, and the aggregate effect on consumption was likely to be small, a theme taken up by Buiter (2010) among others-see Appendix 2 for further discussion. Micro-evidence on the so-called housing wealth effect on consumption has, for some time, confirmed that, at least in countries with home equity withdrawal options, it is much more of a collateral effect than a classical wealth effect (see Hurst and Stafford (2004), Browning et al (2013), Atalay et al (2014), Mian and Sufi (2014), Windsor et al (2015), Andersen et al (2016), Burrows (2018), and Zhang (2019)). In contrast to a pure wealth effect, a collateral effect will necessarily vary over time (as confirmed in the formal model of Berger et al discussed above) and between countries, with credit conditions that govern the ease with which households can access home equity withdrawal.…”

Section: (V) Monetary Transmission To Consumption Through Asset Pricementioning

confidence: 99%

Implications of household-level evidence for policy models: the case of macro-financial linkages

Muellbauer

2020

Oxford Review of Economic Policy

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Macroeconomic policy models should track the different channels of monetary transmission, providing a framework for Monetary Policy Committees. They should also be useful for assessing risks to financial stability, including for designing macroprudential stress tests and instrument settings in the new macroprudential toolkits. Current policy models, including the ‘semi-structural’ non-DSGE econometric models such as FRB-US, are seriously deficient in these respects, failing to capture the credit channel and the role of real estate in the financial accelerator that operated in the global financial crisis, and in key transmission channels in the recovery. Furthermore, developments in economic theory, greatly encouraged by new evidence, have rendered redundant the previously accepted micro-foundations for household behaviour in these policy models. A multi-purpose policy model needs to include a household-housing sub-system. This should contain a consumption function broadly consistent with the micro-evidence with equations for permanent income, for the balance sheet drivers, and for residential investment. To capture the credit channel, this block of the model needs to embed common credit conditions in the equations. Sub-system estimation is required to impose the cross-equation restrictions implied by these common factors.

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“…Veirman and Duncan (2010) used New Zealand's macrodata to show that most changes in real estate wealth and financial wealth are permanent changes, which have a lagging effect on consumption [45]. Burrows (2018) and Cloyne et al (2019) showed that rising house prices increase the market value of real estate and families with a house can obtain more low-cost credit and release liquidity constraints. Therefore, they are able to maintain smooth consumption in each period [46,47].…”

Section: Theoretical Analysismentioning

confidence: 99%

The Dynamic Correlation among Financial Leverage, House Price, and Consumer Expenditure in China

et al. 2021

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With the help of the time-varying parameter vector autoregression with stochastic volatility (TVP-SV-VAR) model and the Bayesian dynamic conditional correlational autoregressive conditional heteroscedasticity (Bayesian DCC-GARCH) model, this study analyzes the interaction mechanism and dynamic correlation among financial leverage, house price, and consumer expenditure (the survey data are collected from China’s National Bureau of Statistics from January 2000 to December 2019; the data on financial leverage and consumer expenditure are from the Wind economic database, and the price of commercial housing was calculated based on the sales volume and area of commercial housing on the official website of China’s National Bureau of Statistics). Empirical results show that an increase in financial leverage significantly increases house prices and reduces consumer expenditure, that a rise in house prices inhibits financial leverage and weakens consumer expenditure, and that an increase in consumer expenditure raises financial leverage and stimulates a rise in house prices. In addition, house price and consumer expenditure are most relevant, followed by financial leverage and consumer expenditure, and then by financial leverage and house price. Therefore, systematic analysis of dynamic correlation among the three variables has important practical significance for formulating appropriate financial policies to stabilize house prices and promote the growth of consumer expenditures. Specially, financial leverage is an important factor to hold back soaring house prices and shrinking consumer expenditure. Therefore, monetary and macroprudential policies should be used to deal with financial leverage variables in order to achieve a balanced and sustainable development of the macroeconomy in China.

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The Impact of House Prices on Consumption in the UK: a New Perspective

Cited by 25 publications

References 44 publications

The future of macroeconomics: macro theory and models at the Bank of England

The future of macroeconomics: macro theory and models at the Bank of England

Implications of household-level evidence for policy models: the case of macro-financial linkages

The Dynamic Correlation among Financial Leverage, House Price, and Consumer Expenditure in China

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