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Booms and busts: consumption, house prices and expectations

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  • Orazio Attanasio

    ()
    (Institute for Fiscal Studies and University College London)

  • Laura Blow

    ()
    (Institute for Fiscal Studies)

  • Robert Hamilton
  • Andrew Leicester

    ()
    (Institute for Fiscal Studies and University College London)

Abstract

Over much of the past 25 years, the cycles of house price and consumption growth have been closely synchronised. Three main hypotheses for this co-movement have been proposed in the literature. First, that an increase in house prices raises households' wealth, particularly for those in a position to trade down the housing ladder, which increases their desired level of expenditure. Second, that house price growth increases the collateral available to homeowners, reducing credit constraints and thereby facilitating higher consumption. And third, that house prices and consumption have tended to be influenced by common factors. This paper finds that the relationship between house prices and consumption is stronger for younger than older households, which appears to contradict the wealth channel. These findings therefore suggest that common causality has been the most important factor behind the link between house price and consumption.

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Bibliographic Info

Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W05/24.

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Length: 39 pp.
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:ifs:ifsewp:05/24

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Keywords: House prices; consumption booms; wealth effects; collateral effects; common causality;

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References

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  1. Karl E. Case & Robert J. Shiller & John M. Quigley, 2001. "Comparing Wealth Effects: The Stock Market Versus the Housing Market," NBER Working Papers 8606, National Bureau of Economic Research, Inc.
  2. Ludwig Alexander & Sløk Torsten, 2004. "The Relationship between Stock Prices, House Prices and Consumption in OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-28, March.
  3. John Y. Campbell & João F. Cocco, 2005. "How Do House Prices Affect Consumption? Evidence From Micro Data," NBER Working Papers 11534, National Bureau of Economic Research, Inc.
  4. Ludwig, Alexander & Sløk, Torsten, 2004. "The relationship between stock prices, house prices and consumption in OECD," Sonderforschungsbereich 504 Publications 04-12, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  5. Todd Sinai & Nicholas S. Souleles, 2003. "Owner-Occupied Housing as a Hedge Against Rent Risk," NBER Working Papers 9462, National Bureau of Economic Research, Inc.
  6. Browning, Martin & Deaton, Angus & Irish, Margaret, 1985. "A Profitable Approach to Labor Supply and Commodity Demands over the Life-Cycle," Econometrica, Econometric Society, vol. 53(3), pages 503-43, May.
  7. Deaton, Angus, 1985. "Panel data from time series of cross-sections," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 109-126.
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  1. House prices and consumption: how model specification matters
    by Economic Logician in Economic Logic on 2012-01-31 14:50:00
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