House Price Shocks, Negative Equity, and Household Consumption in the United Kingdom (original) (raw)

House Price Shocks, Negative Equity and Household Consumption in the UK in the 1990s

2002

We examine the impact of housing capital gains on savings behaviour during the 1990s British housing market cycle using microdata from the British Household Panel Survey and county-level house price data. We condition the models on household real financial capital gains using Family Resources Survey data. We find a marginal propensity to consume out of housing wealth of between 0.01 and 0.03, depending on specification. Among our novel findings are asymmetric behaviour between periods of house price rises and falls, with stronger consumption response during periods of house price increases, and a disproportionate impact on saving if the household has negative housing equity.

Consumption Responses to Permanent and Transitory Shocks to House Appreciation

SSRN Electronic Journal, 2000

We estimate the marginal propensity to consume (MPC) out of permanent and transitory shocks to house price appreciation. Besides borrowing constraints, we consider two different models under which those shocks may affect consumption. In the first one, we treat housing as a risky asset. In the second one, housing has a role as a consumption and as an investment good. In both, changes in the rate of house price appreciation may affect nonhousing consumption. Shocks to appreciation rates may happen when increases in future house prices are expected to differ from the current ones because heterogeneity, market failures or errors in expectations. We test the implications of those models empirically using the PSID's imputed total consumption from food consumption and self-reported house values, and base our identification strategy on two sources of variation in the appreciation rate. The first source depends on the fact that home prices are far more cyclical in areas where the supply of housing is relatively inelastic, causing the permanent and the transitory changes in appreciation rates to vary significantly by area. The second source is households' perceptions about which parts of shocks to appreciation rates are permanent or transitory. We model households' self-reported rate of appreciation as an AR(1) process and use both the Hodrick-Prescott and the Kalman filter to separate households' perceptions about permanent and transitory shocks to appreciation. Our results show that (1) consumption responses to house wealth shocks vary greatly by area and depend upon the area-specific levels of temporal persistence and variance of those shocks; (2) the overall MPC out of those shocks is 3.5%; (3) the MPC out of permanent shocks is between 3.4% and 9.1%; and (4) the MPC out of transitory shocks is between 0.5% and 3.3%.

House Price Shocks and Household Indebtedness in the United Kingdom

Economica, 2009

We use household panel data to explore the link between changes in house prices and household indebtedness (both secured on housing assets and unsecured) in the United Kingdom. We show that households which are borrowing-constrained by a lack of housing equity as collateral make greater use of unsecured debt such as credit cards or personal loans. In response to rising house prices, which relax this constraint, such households are more likely to refinance and to increase their indebtedness relative to unconstrained households. However, for most households, house price movements appear to have little impact on indebtedness.

House Prices, Consumption, and Government Spending Shocks

2012

Abstract We highlight that DSGE models with housing and collateralized borrowing predict a fall in both house prices and consumption following positive government spending shocks. The quasi-constant shadow value of lenders' housing and the negative wealth effect of future tax increases on their consumption are the key reasons for this result.

How do house prices affect consumption? Evidence from micro data

Journal of Monetary Economics, 2007

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. 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.

Housing Wealth and Household Indebtedness: Is there a Household 'Financial Accelerator'?

The 'financial accelerator' model when applied to households states that shocks to household balance sheets (primarily changes in house prices) amplify fluctuations in consumer spending by tightening or relaxing collateral constraints on borrowing. We construct an alternative model where households also have access to unsecured debt, and examine the effect of shocks to house prices on debt-financed consumption in this augmented setting. Our alternative model reduces the amplitude of fluctuations in debt-financed consumer spending arising from fluctuations in household asset values. The paper tests the applicability of the two models using panel data for the United Kingdom that allow us to measure collateral constraints, changes in asset values and financial indebtedness at the household level.

Channels from Housing Wealth to Consumption

Housing Studies, 2013

This paper uses micro-data from two national panel surveys to analyse the flow of wealth from residential property onto households' balance sheets, where it is available for discretionary spending. The examples are Australia and the UK-two of the world's most entrenched nations of owner occupation, both with relatively complete mortgage markets. We focus on the early 2000s, which set the scene for an unprecedented wave of housing equity withdrawal. We consider equity released through sales and through additional borrowing. The findings show that equity extraction overall is not only (or even) a function of higher incomes, greater wealth and older age. Rather, it occurs across the life course, and is linked to pressing spending needs. We draw attention in particular to the growing social and economic significance of in situ equity borrowinga practice whose financial buffering effects may form a short-lived prelude, rather than a sustainable alternative, to trading on or selling up

Are Housing Wealth Effects Asymmetric in Booms and Busts? Evidence from New Zealand

Real Estate Finance and Economics, 2020

This paper investigates the effects of household indebtedness and housing wealth on consumption. To identify exogenous movements of housing wealth and leverage, we estimate housing supply elasticities for New Zealand urban centers. We construct synthetic panel series by using household survey data to estimate the marginal propensity to consume out of exogenous changes in housing wealth, while controlling for the household leverage ratio. Our empirical results show that, on average, the marginal propensity to consume out of housing wealth is about 3 cents out of one dollar. But it is larger, about 4 cents, in response to falling house wealth than to increasing housing wealth, about 2 cents. We further investigate the role of household indebtedness in accounting for the asymmetric effect. Our findings suggest that household leverage reinforces the housing wealth effect in a housing bust, but dampens the housing wealth effect in a boom.

Housing Wealth and Consumption Expenditure

This memo considers the effect of housing wealth fluctuations on consumption expenditures. While empirical evidence from macroeconomic, regional, and microeconomic data varies, on balance most of the evidence seems consistent with a medium-run (after 3 years or so) housing wealth MPC in the neighborhood of 5-10 cents. The paper presents its own methodology for estimating the housing MPC, and concludes that the immediate (next-quarter) MPC from a change in housing wealth is around 1.5 cents, with a final long-run effect of about 9 cents. Finally, the paper estimates that the growth in housing wealth since 2000q1 left the level of aggregate consumption about 2.2 percentage points higher by 2003q3 than it would have been if housing wealth had been flat over the intervening period, possibly providing a partial explanation for the surprising strength of spending in the wake of the stock market declines over the last few years.

Feeling Rich, Feeling Poor: Housing Wealth Effects and Consumption in Europe

IMF working paper, 2023

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 inflationadjusted 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.