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Feeling Rich, Feeling Poor: Housing Wealth Effects and Consumption in Europe

Author

Listed:
  • Serhan Cevik

    (International Monetary Fund)

  • Sadhna Naik

    (International Monetary Fund)

Abstract

Households across Europe are struggling with a double crisis — the worst inflation shock since the World War II and a sudden correction in house prices. There is a rich literature on how housing price cycles affect consumer spending, finding mixed results with a wide range of consumption responses to changes in housing wealth. In this paper, using quarterly data on 20 countries in Europe over the period 1980-2023, we analyze the dynamic relationship between inflation-adjusted house prices, disposable income and consumer spending and obtain statistically significant and economically intuitive results. Household consumption responds positively and swiftly to changes in real house prices and gross disposable income as expected. Quantitatively, we find that private consumption falls by 0.13 percentage points on average for one percent decrease in real house prices and 0.02 percentage points for a one percent decrease in real gross disposable income in the first quarter after the shock, plateauing after six and four quarters, respectively.

Suggested Citation

  • Serhan Cevik & Sadhna Naik, 2025. "Feeling Rich, Feeling Poor: Housing Wealth Effects and Consumption in Europe," Annals of Economics and Finance, Society for AEF, vol. 26(1), pages 361-375, May.
    • Handle: RePEc:cuf:journl:y:2025:v:26:i:1:ceviknaik
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    Keywords

    House prices; Wealth effects; Consumer spending; Europe;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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