Working Paper: CEPR ID: DP18034
Authors: Roine Vestman; Jesper Bojeryd; Björn Tyrefors; Dany Kessel
Abstract: 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.
Keywords: Consumption; House Prices; Marginal Propensity to Consume; Housing Wealth; Collateral Effect; House Price Elasticity
JEL Codes: D12; E21; E32; E44; E60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Housing wealth shock (G51) | Marginal propensity to consume (car expenditures) (D12) |
| Housing wealth shock (G51) | Household consumption (car purchases) (D19) |
| Housing wealth shock (G51) | House prices (R31) |
| House prices (R31) | Household consumption (car purchases) (D19) |
| High loan-to-value (LTV) ratios and low bank deposits (G21) | Household consumption (car purchases) (D19) |