Has the effect of housing wealth on household consumption been overestimated? New evidence on magnitude and allocation

Abstract

The effect of housing wealth on household consumption is puzzling as the estimated housing wealth effect in previous literature is substantially larger than what the theory predicts. This paper reinvestigates the effect of housing wealth on households’ non-housing consumption. Using the Panel Study of Income Dynamics, this study demonstrates an overestimation in prior literature by showing that the overall housing wealth effect on consumption drops to zero once household-level fixed effects are included. The impact of financial wealth and income – which are more liquid than housing wealth – on consumption remains positive and significant. The zero housing wealth effect is time-insensitive and stays robust after addressing the attenuation bias. We also directly control for the collateral channel and find that the estimated zero housing wealth effect stays unchanged, but households do increase their non-housing consumption by extracting their home equity when home prices increase. When breaking out into different consumption categories, we only observe a slight increase in clothing consumption in response to changes in housing wealth, which is more likely to be one-time and auxiliary expenses compared to consumption such as food and transportation.