Housing, credit and consumer expenditure

Many factors have contributed to the development of credit markets, easing access of households to credit. This paper considers the implications of easier credit for the influence of higher house prices on consumer expenditure. It argues that with poorly developed credit markets, the effect is likely to be negative, but becomes positive as access to housing collateral increases and down-payments for first time homebuyers fall in relation to values. The implications for differences between countries and changes in consumer behaviour over time are explored. Previous studies are reviewed: the omission of credit liberalization and other controls has often biased estimates of housing 'wealth' effects on consumption. New empirical estimates for the U.K. and U.S. suggest that there was no housing 'wealth effect' before credit market liberalization, but that the housing collateral effect is now significant, larger than the stock market wealth effect, and about twice as large in the U.S. as the U.K.