Abstract
The macroeconomic literature has identified a robust relationship between house prices and consumption at the aggregate level. The microeconomic literature points to three possible mechanisms behind this relationship: the wealth effect, whereby households respond to changes in housing wealth by spending/saving more; the collateral effect whereby households use the main residence as collateral for consumer loans; and the common causality effect whereby one or more variables affect both house prices and consumption simultaneously. I test the implications of these mechanisms using data from a panel survey representative of the Dutch population. For that purpose, I employ measures of subjective house prices and subjective house price expectations. Results suggest that the wealth and the collateral effects play, at best, minor roles in explaining the aggregate relationship between house prices and consumption.
Highlights
The relationship between house prices and household saving and consumption has been largely studied in the economic literature
This study investigates the mechanisms behind the correlation between house prices and consumption reported in Fig. 1.1 in the introduction
This study contributes to previous literature by introducing the use of data on subjective house prices and house price expectations, by exploiting the recent sharp house price swings in the Netherlands, and by clearly separating the wealth and the collateral effects using panel survey data
Summary
The relationship between house prices and household saving and consumption has been largely studied in the economic literature. I use a more recent stream of microeconomic literature as a benchmark (e.g. Campbell and Cocco, 2007; Attanasio et al, 2009; Disney et al, 2010a; Browning et al, 2013) This literature makes an effort to identify the different above-mentioned mechanisms using the life cycle-model as a theoretical framework. The results of the wealth effect estimation yield a negative marginal propensity to consume (MPC) of 0.02%, i.e. when house prices increase by one euro, consumption (saving) decreases (increases) by 0.2 cents This estimate is very small, not significantly different from zero, and the precision of the estimate allows ruling out any large wealth effects. The appendices provide summary statistics, additional descriptive statistics and results, and the theoretical model
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