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Housing Market Activity and Consumption: Macro and Micro Evidence

Author

Listed:
  • Clancy, Daragh

    (Central Bank of Ireland)

  • Cussen, Mary

    (Central Bank of Ireland)

  • Lydon, Reamonn

    (Central Bank of Ireland)

Abstract

This paper analyses how developments in the housing market affect consumer spending. Using aggregate data, we show that housing wealth exerts a positive influence on consumption. Whilst informative, the aggregate results not allow us to identify housing wealth effects separately from credit effects, income expectations and complementarity effects. Survey data is therefore used to assess whether behaviour at the household level can further explain consumption trends at the aggregate level. We observe a strong correlation between house price levels and consumption for young, middle- and older-aged cohorts. The strong house price effects for younger cohorts in particular, who are predominantly renters, suggests that house prices are also a proxy for changes in in permanent income. However, our analysis also suggests that significant housing wealth effects are present, particularly when it comes to spending on durable goods. Our research highlights not only the benefits of combining household and aggregate level data for understanding consumption, but also the importance of decomposing consumption into its constituent parts for understanding housing wealth effects in particular.

Suggested Citation

  • Clancy, Daragh & Cussen, Mary & Lydon, Reamonn, 2014. "Housing Market Activity and Consumption: Macro and Micro Evidence," Research Technical Papers 13/RT/14, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:13/rt/14
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    Cited by:

    1. Clancy, Daragh & Cussen, Mary & Lydon, Reamonn, 2014. "Housing market developments and household consumption," Economic Letters 09/EL/14, Central Bank of Ireland.
    2. Clancy, Daragh & Merola, Rossana, 2017. "Countercyclical capital rules for small open economies," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 332-351.

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    More about this item

    Keywords

    consumption; wealth effects; credit conditions; income expectations; business cycle; durable goods.;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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