The Relationship between Stock Prices, House Prices and Consumption in OECD Countries

Abstract

This paper analyzes the relationship between stock prices, house prices and consumption using data for 16 OECD countries. The panel data analysis suggests that the long-run responsiveness of consumption to permanent changes in stock prices is higher for countries with a market-based financial system than for countries with a bank-based financial system. Splitting the sample into the 1980s and 1990s further shows an increased sensitivity in the 1990's of consumption to permanent changes in stock prices for both countries with bank-based financial systems as well as countries with market-based financial systems. The relationship between changes in consumption and changes in house prices is positive for the second sample period across all specifications and financial systems.

What Drives Personal Consumption? The Role of Housing and Financial Wealth

“…5 Ludwig and Sløk (2004), Catte et al (2004) and Cardarelli et al (2008) bring some evidence on this, which I confirm and extend below.…”

“…Cross-country comparative work includes Bertaut (2002), Ludwig and Sløk (2004), Catte et al (2004), Case et al (2005) and Labhard et al (2005). The implications of these papers are constrained by data limitations, which I try to alleviate.…”

“…4 In a closely related paper, Ludwig and Sløk (2004) estimate in a panel of 14 OECD countries that the elasticity of consumption with respect to stock prices is considerably higher than with respect to housing prices. Both elasticities have increased after 1984.…”

“…The implications of these papers are constrained by data limitations, which I try to alleviate. In particular, the above papers do not investigate housing wealth effect (Bertaut, 2002 andLabhard et al, 2005), use annual data (Case et al, 2005 andin part Catte et al, 2004), relatively few countries (Bertaut, 2002;Catte et al, 2004 andCardarelli et al, 2008) or proxy wealth variables with stock and real estate prices (Ludwig andSløk, 2004 andCardarelli et al, 2008).…”

An Early Warning System to Predict the House Price Bubbles

“…For example, Almeida et al (2006) have reported evidence that the sensitivity of house prices and mortgage borrowings to income shocks is higher in countries with higher loan-to-value ratios. Ludwig and Sløk (2004) and Carroll et al (2006) have emphasized that the long-run responsiveness of consumption to permanent changes in housing wealth is higher for countries with a market-based than for countries with a bank-based financial system. According to Catte et al (2004), strong impacts of real house prices on consumption can be detected especially in countries that have large, efficient and responsive mortgage markets.…”