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The life-cycle effects of house price changes

Author

Listed:
  • 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.

Suggested Citation

  • Wenli Li & Rui Yao, 2005. "The life-cycle effects of house price changes," Working Papers 05-7, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:05-7
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    References listed on IDEAS

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    Keywords

    Consumption (Economics); Saving and investment; Housing; Mortgages;
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