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Housing Wealth isn't Wealth

  • Buiter, Willem H.

A fall in house prices due to a change in fundamental value redistributes wealth from those long housing (for whom the fundamental value of the house they own exceeds the present discounted value of their planned future consumption of housing services) to those short housing. In a representative agent model and in the Yaari-Blanchard OLG model used in the paper, there is no pure wealth effect on consumption from a change in house prices if this represents a change in fundamental value. There is a pure wealth effect on consumption from a change in house prices if this reflects a change in the speculative bubble component of house prices. Two other channels through which house prices can affect aggregate consumption are (1) redistribution effects if the marginal propensity to spend out of wealth differs between those long housing and those short housing and (2) collateral or credit effects due to the collateralisability of housing wealth and the non-collateralisability of human wealth. A decline in house prices reduces the scope for mortgage equity withdrawal. For given sequences of future after-tax labour income and interest rates, this may depress consumption in the short run while boosting it in the long run.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6920.

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Date of creation: Jul 2008
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Handle: RePEc:cpr:ceprdp:6920
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  1. Vladimir Klyuev & Paul Mills, 2007. "Is Housing Wealth an “ATM”? The Relationship Between Household Wealth, Home Equity Withdrawal, and Saving Rates," IMF Staff Papers, Palgrave Macmillan, vol. 54(3), pages 539-561, July.
  2. Khandani, Amir E. & Lo, Andrew W. & Merton, Robert C., 2013. "Systemic risk and the refinancing ratchet effect," Journal of Financial Economics, Elsevier, vol. 108(1), pages 29-45.
  3. Iacoviello, Matteo, 2004. "Consumption, House Prices and Collateral Constraints: A Structural Econometric Analysis," 2004 Meeting Papers 207b, Society for Economic Dynamics.
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  8. Buiter, Willem H, 1988. "Death, Birth, Productivity Growth and Debt Neutrality," Economic Journal, Royal Economic Society, vol. 98(391), pages 279-93, June.
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  12. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jirka, 2006. "How large is the housing wealth effect? A new approach," CFS Working Paper Series 2006/35, Center for Financial Studies (CFS).
  13. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
  14. Flint Brayton & Eileen Mauskopf & David Reifschneider & Peter Tinsley & John Williams, 1997. "The role of expectations in the FRB/US macroeconomic model," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 227-245.
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