Working Paper: NBER ID: w11534
Authors: John Y. Campbell; Joo F. Cocco
Abstract: 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.
Keywords: House Prices; Consumption; Micro Data; Wealth Effect; Borrowing Constraints
JEL Codes: D1; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| House Prices (R31) | Household Consumption (D10) |
| Rising House Prices (R31) | Increased Consumption for Older Homeowners (R21) |
| Rising House Prices (R31) | Increased Consumption for Younger Renters (R21) |
| Predictable Changes in House Prices (R31) | Predictable Changes in Consumption (D12) |
| House Prices (R31) | Consumption influenced by Unobserved Macroeconomic Factors (E20) |