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The life-cycle effects of house price changes

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Author Info
Wenli Li
Rui Yao
Abstract

The authors develop a life-cycle model to study the effects of house price changes on household consumption and welfare. The model explicitly incorporates the dual feature of housing as both a consumption good and an investment asset and allows for costly adjustments in housing and mortgage positions. Li and Yao's analysis indicates that although house price changes have small aggregate effects, their consumption and welfare consequences on individual households vary significantly. In particular, the non-housing consumption of young and old homeowners is much more sensitive to house price changes than that of middle-aged homeowners. More importantly, while house price appreciation increases the net worth and consumption of all homeowners, it only improves the welfare of middle-aged and old homeowners. Young homeowners and renters are worse off due to higher life-cycle housing consumption costs.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 05-7.

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Date of creation: 2005
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Handle: RePEc:fip:fedpwp:05-7

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Related research
Keywords: Consumption (Economics) ; Saving and investment ; Housing ; Mortgages;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Steven F. Venti & David A. Wise, 2000. "Aging and Housing Equity," NBER Working Papers 7882, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. John Y. Campbell & Joao F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," NBER Working Papers 9759, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. William N. Goetzmann & Matthew I. Spiegel, 2000. "The Policy Implications of Portfolio Choice in Underserved Mortgage Markets," Yale School of Management Working Papers ysm161, Yale School of Management. [Downloadable!]
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  6. Carroll, Christopher D, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 1-55, February.
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  7. Patrick Bajari & C. Lanier Benkard & John Krainer, 2003. "House Prices and Consumer Welfare," NBER Working Papers 9783, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 18(2), pages 535-567. [Downloadable!] (restricted)
  9. Morris A. Davis & Jonathan Heathcote, 2005. "Housing And The Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 751-784, 08. [Downloadable!] (restricted)
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  10. Storesletten, Kjetil & Telmer, Christopher I. & Yaron, Amir, 2004. "Consumption and risk sharing over the life cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 609-633, April. [Downloadable!] (restricted)
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  11. Gervais, Martin, 2002. "Housing taxation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1461-1489, October. [Downloadable!] (restricted)
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  12. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March. [Downloadable!] (restricted)
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  16. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September. [Downloadable!] (restricted)
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  17. Yoshiro Miwa & Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2004. "Accounting for Changes in the Homeownership Rate," CIRJE F-Series CIRJE-F-312, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
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  18. John D. Benjamin & Peter Chinloy & G. Donald Jud, 2004. "Real Estate Versus Financial Wealth in Consumption," The Journal of Real Estate Finance and Economics, Springer, vol. 29(3), pages 341-354, November. [Downloadable!]
  19. S. Rao Aiyagari & Ellen R. McGrattan, 1994. "The optimal quantity of debt," Working Papers 538, Federal Reserve Bank of Minneapolis.
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  20. John Campbell & Joao Cocco, 2004. "How Do House Prices Affect Consumption? Evidence from Micro Data," 2004 Meeting Papers 357a, Society for Economic Dynamics.
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  21. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-Occupied Housing as a Hedge Against Rent Risk," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 763-789, May.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sang-Wook Stanley Cho, 2007. "Accounting for Lifecycle Wealth Accumulation: The Role of Housing Institution," Discussion Papers 2007-27, School of Economics, The University of New South Wales. [Downloadable!]
  2. Sang-Wook Stanley Cho, 2007. "Household Wealth Accumulation and Portfolio Choices in Korea," Discussion Papers 2007-26, School of Economics, The University of New South Wales. [Downloadable!]
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