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This paper analyzes the existence of “wealth effects” derived from net equity (in the form of housing, financial assets, and total net worth) on consumption. The study uses longitudinal household-level data?from the Panel Study of Income Dynamics (PSID) ?covering about 7,000-9,000 households in the U.S., with the estimations carried over the period 1999-2017. Overall, wealth effects are found to be relatively large and significant for housing wealth, but less so for other types of wealth, including stocks. Furthermore, the analysis shows how these estimated marginal propensities to consume (MPC) from wealth are closely linked to household characteristics, including income and demographic factors. Finally, underlying structural changes in household characteristics point to potentially lower aggregate MPCs from wealth going forward.
We provide new, time-varying estimates of the housing wealth effect back to the 1980s. We exploit systematic differences in city-level exposure to regional house price cycles to instrument for house prices. Our main findings are that: 1) Large housing wealth effects are not new: we estimate substantial effects back to the mid 1980s; 2) Housing wealth effects were not particularly large in the 2000s; if anything, they were larger prior to 2000; and 3) There is no evidence of a boom-bust asymmetry. We compare these findings to the implications of a standard life-cycle model with borrowing constraints, uninsurable income risk, illiquid housing, and long-term mortgages. The model explains our empirical findings about the insensitivity of the housing wealth effects to changes in the loan-to-value (LTV) distribution, including the dramatic rise in LTVs in the Great Recession. The insensitivity arises in the model for two reasons. First, impatient low-LTV agents have a high elasticity. Second, a rightward shift in the LTV distribution increases not only the number of highly sensitive constrained agents but also the number of underwater agents whose consumption is insensitive to house prices.
This paper presents a simple new method for estimating the size of 'wealth effects' on aggregate consumption. The method exploits the well-documented sluggishness of consumption growth (often interpreted as 'habits' in the asset pricing literature) to distinguish between short-run and long-run wealth effects. In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final long-run effect around 9 cents. Consistent with several recent studies, we find a housing wealth effect that is substantially larger than the stock wealth effect. We believe that our approach is preferable to the currently popular cointegration- based estimation methods, because neither theory nor evidence justifies faith in the existence of a stable cointegrating vector.
"Current estimates of housing wealth effects vary widely. We consider the role of omitted variables suggested by economic theory that have been absent in a number of prior studies. Our estimates take into account age composition and wealth distribution (using poverty rates as a proxy), as well as wealth shares (how much of total wealth is comprised of housing vs. stock wealth). We exploit cross-state variation in housing, stock wealth and other variables in a newly assembled panel data set and find that the impact of housing on consumer spending depends crucially on age composition, poverty rates, and the housing wealth share. In particular, young people who are more likely to be credit-constrained, and older homeowners, likely to be "trading down" on their housing stock, experience the largest housing wealth effects, as suggested by theory. Also, as suggested by theory, housing wealth effects are higher in state-years with higher housing wealth shares, and in state-years with higher poverty rates (likely reflecting the greater importance of credit constraints for those observations). Taking these various factors into account implies huge variation over time and across states in the size of housing wealth effects"--National Bureau of Economic Research web site
Households across Europe are struggling with a double crisis—the worst inflation shock since the World War II and a sudden correction in house prices. There is a rich literature on how housing price cycles affect consumer spending, finding mixed results with a wide range of consumption responses to changes in housing wealth. In this paper, using quarterly data on 20 countries in Europe over the period 1980–2023, we analyze the dynamic relationship between inflation-adjusted housing wealth and consumer spending and obtain statistically significant and economically intuitive results. Household consumption responds positively and swiftly to changes in real house prices and gross disposable income as expected. Using the estimated coefficients, we can deduce that the average quarter-on-quarter decline of -1.96 percent in real house prices in the first quarter of 2023 in Europe could dampen consumer spending by about -0.51 percentage points in real terms on a cumulative basis over a horizon of eight quarters.
Empirical studies have estimated a big range of consumption response sizes to changes in house prices. Using a quasi-experiment, we estimate a shock of -19.4 percent to house prices in the area surrounding an airport in Stockholm after its operations were unexpectedly continued as a result of political bargaining behind closed doors. This source of price divergence is ideal for identifying housing wealth effects since it is local and unrelated to variations in macroeconomic conditions. Using a household data set with information on the location of primary residence relative to the airport, we find a short-run elasticity with respect to new car purchases of 0.39, corresponding to a one-year marginal propensity for car expenditures of 0.12 cents per dollar lost in housing wealth. Households with high loan-to-value ratios and little bank deposits respond the most. A quantitative model is consistent with the empirical findings and pinpoints important determinants of the response size, which may explain the variation in previous estimates.
During the recession in the years 2008-2009, the most severe for mature economies in the post-war period, housing markets were often mentioned as having a special responsibility. The objective of this book is to shed light on the cyclical behaviour of the housing markets, its fundamental determinants in terms of supply and demand characteristics, and its relationship with the overall business cycle. The co-movements of house prices across countries are also considered, as well as the channel of transmission of house price changes to the rest of the economy. Particular attention is paid to the effects on private consumption, through possible wealth effects. The book is a compilation of original papers produced by economists and researchers from the four main national central banks in the euro area, also with the participation of leading academics.
Shows how the politics of banking crises has been transformed by the growing 'great expectations' among middle class voters that governments should protect their wealth.