Housing Wealth Isn't Wealth (original) (raw)

Economics, the Open-Access, Open-Assessment E-Journal 3, 2010-22.

"A fall in house prices due to a change in its fundamental value redistributes wealth from those long housing (for whom the fundamental value of the house they own exceeds the present discounted value of their planned future consumption of housing services) to those short housing. In a closed economy representative agent model and in the Yaari-Blanchard OLG model used in the paper, there is no pure wealth effect on consumption from a change in house prices if this represents a change in their fundamental value. There is a pure wealth effect on consumption from a change in house prices if this reflects a change in the speculative bubble component of house prices. Two other channels through which a fall in house prices can affect aggregate consumption are (1) redistribution effects if the marginal propensity to spend out of wealth differs between those long housing (the old, say) and those short housing (the young, say) and (2) collateral or credit effects due to the collateralisability of housing wealth and the non-collateralisability of human wealth. A decline in house prices reduces the scope for mortgage equity withdrawal. For given sequences of future after-tax labour income and interest rates, this may depress consumption in the short run while boosting it in the long run. JEL Classification: E2, E3, E5, E6, G1 Key words: wealth effect, house prices, speculative bubbles."

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How Large is the Housing Wealth Effect? A New Approach

NBER working paper, 2006

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 longrun effect around 9 cents. Consistent with most recent studies, we find a housing wealth effect that is substantially larger than the stock wealth effect. We believe that our approach has sounder theoretical foundations than the currently popular cointegration-based estimation methods, because neither theory nor evidence provides any reason for faith in the existence of a stable cointegrating vector.

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Research in International Business and Finance, 2018

This paper studies the optimal level of housing wealth theoretically and empirically. It first develops a housing model based on the wealth effects on the optimal growth path model of Kurz (1968) and shows that there is an optimal ratio between the housing wealth and income (h-y ratio), housing wealth and consumption (h-c ratio), and housing wealth and total wealth (h-w ratio). The paper next shows that the calibrated h-y, h-c and h-w ratios are markedly consistent with the US data, the benchmark economy. In particular, it confirms that they are about 1.5, 2.2, and 0.35, respectively. Finally, the paper econometrically investigates the long run relationship between h-y, h-c, and h-w in the US economy, using the cointegration approach with structural shift. The empirical analyses show that (i) there is a long-run cointegration relation for the variables of interest, (ii) the estimated long-run response of housing wealth to income, to consumption and to total wealth are consistent with stylized values, and (iii) the time varying responses of housing wealth adequately reflect the effects of some major shocks in the US economy. As a policy implication, we argue that an economy having h-y, h-c, and h-w ratios substantially higher than the optimal values may be considered to indicate a bubble in housing, which may imply waste of its productive resources invested in a non-productive asset, and hence intervention of policy maker with contractionary policies.

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

Can the Consumption-Wealth Ratio Predict Housing Returns? Evidence from OECD Countries

Real Estate Economics

We use a representative consumer model to analyse the relation between the transitory deviations of consumption from its common trend with aggregate wealth and labour income, cay, and the housing risk premium. The evidence based on data for 15 OECD countries shows that, if financial and housing assets are seen as complements, investors will temporarily allow consumption to rise when they expect a rise in future housing returns. By contrast, if housing assets are treated as substitutes for financial assets, consumption will be reduced.

House prices wealth effect and labor supply IFS Working Paper W 14 / 2 5

2014

We examine the impact of housing wealth on labor supply decisions using data on exogenous local variation in house prices merged into household panel data for Britain. Our estimates are conditioned on variations in local labor demand and income expectations as these may co-determine housing wealth and labor supply. We use renters as a control group and test for the potential endogeneity of tenure and location. We find significant housing wealth effects on labor supply among young married / co-habiting female owners and older male owners, consistent with leisure being a normal good. The size of these effects is economically important. Our estimates imply housing wealth effects have stronger effects then local labor market conditions upon participation decisions for these workers.

House prices, wealth effects and labor supply

Housing wealth effect in emerging economies

Emerging Markets Review, 2011

In this paper I estimate the impact of changes in real and financial wealth on private consumption for a panel of 17 emerging economies from Asia and Central and Eastern Europe. Households' consumption, income and the two measures of real and financial wealthproxied by house and stock market pricesare found to be differencestationary and co-integrated; by means of recent econometric techniques for heterogeneous panels, i.e. the pooled mean group estimator, inference is drawn about the long-and short-run relationships between the variables of interest. The main result of the analysis shows that both real and financial wealth positively affect households' consumption in the long-run, with the elasticity of housing wealth being larger than that of stock market wealth. Moreover, there is also a significant short-run adjustment from income, stock prices and house prices on consumption, i.e. consumption adjusts to its long-run relationship with lags. When the model is run for the two groups of countries separately, the long-run impact of an increase (decrease) in house prices is generally higher in Central and Eastern European economies with respect to Asian ones, which make them more vulnerable to further adverse housing market developments.

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