The Stock Market, the Housing Market and Consumer Behaviour

After the buoyancy of stock markets in the late nineties, share prices have generally trended downwards since 2001. By contrast, house prices have continued to increase, rising more rapidly than the general price level in several countries. These developments have led to renewed interest in the impact of asset prices on consumption and overall demand. This paper analyses the roles of household financial wealth and housing wealth across G7 countries (with the exception of Germany), in determining private consumption. It provides some estimates of the sensitivity of consumption to various forms of wealth and tests whether these sensitivities have changed over time. The impacts of recent financial and housing market developments on consumption are also quantified. The main results are, first, that for all countries, wealth channels are identified, second, that these effects vary significantly across countries, and third that for some countries, their importance has tended to rise markedly over the recent past.