Abstract
Large variations in house prices can lead to significant changes in the level of household wealth and this may affect household consumption. Using Lettau and Ludvigson’s [Lettau, M., Ludvigson, S.C., 2004. Understanding trend and cycle in asset values: reevaluating the wealth effect on consumption. American Economic Review 94, 276–299] cointegration approach, we investigate the response of non-housing consumption to permanent and transitory changes in financial and non-financial (housing) wealth in Australia since the mid-1970s. The data provide evidence that housing wealth contains a large transitory component, but up to 2004 at least, these transitory changes in wealth are not associated with any significant response in consumption. When post-2004 data are included in the estimation, there is some evidence that household consumption responds to recent transitory rises in wealth and labor income. However this finding needs to be weighed against weaker evidence of a cointegrating relationship for consumption, income and wealth.
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