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Do House Prices Affect Consumption? A Re-assessment of the Wealth Hypothesis

Author

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  • Cristini, Annalisa

    (University of Bergamo)

  • Sevilla, Almudena

    (London School of Economics)

Abstract

This paper undertakes a comparison exercise to disentangle what drives the opposite findings regarding the effect of house prices on consumption documented in two papers using the same data set for the UK. On the one hand, Campbell and Cocco (2007) find that old owners are the most benefited by a house price increase and young renters the least, confirming the so-called wealth hypothesis. On the other hand, Attanasio, Blow, Hamilton, and Leicester (2009) find that house prices have the same impact on consumption across age groups, consistent with the so-called common factor hypothesis. First, we confirm that the findings in both papers can be reproduced. Second, we rule out a number of potential reasons related to the basic data construction, and provide evidence that the functional form (i.e., an Euler equation of consumption vs. a reduced form life-cycle model) and not data aggregation considerations (household level data vs. synthetic cohort data) may be at the root of the conflicting results in the two papers. Our findings revive the debate of whether there is an effect of house prices on consumption.

Suggested Citation

  • Cristini, Annalisa & Sevilla, Almudena, 2013. "Do House Prices Affect Consumption? A Re-assessment of the Wealth Hypothesis," IZA Discussion Papers 7576, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp7576
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    References listed on IDEAS

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    Cited by:

    1. Henrik Yde Andersen & Søren Leth-Petersen, 2021. "Housing Wealth or Collateral: How Home Value Shocks Drive Home Equity Extraction and Spending," Journal of the European Economic Association, European Economic Association, vol. 19(1), pages 403-440.
    2. Kai Dong & Ching-Ter Chang & Shaonan Wang & Xiaoxi Liu, 2021. "The Dynamic Correlation among Financial Leverage, House Price, and Consumer Expenditure in China," Sustainability, MDPI, vol. 13(5), pages 1-18, March.
    3. Yener Coskun & Burak Sencer Atasoy & Giacomo Morri & Esra Alp, 2018. "Wealth Effects on Household Final Consumption: Stock and Housing Market Channels," IJFS, MDPI, vol. 6(2), pages 1-32, June.
    4. Gustafsson, Peter & Stockhammar, Pär & Österholm, Pär, 2016. "Macroeconomic effects of a decline in housing prices in Sweden," Journal of Policy Modeling, Elsevier, vol. 38(2), pages 242-255.
    5. Atalay, Kadir & Edwards, Rebecca, 2022. "House prices, housing wealth and financial well-being," Journal of Urban Economics, Elsevier, vol. 129(C).
    6. Signe Rosenberg, 2015. "The Impact of a Change in Real Estate Value on Private Consumption in Estonia," Research in Economics and Business: Central and Eastern Europe, Tallinn School of Economics and Business Administration, Tallinn University of Technology, vol. 7(2).
    7. Hori Masahiro & Niizeki Takeshi, 2019. "Housing Wealth Effects in Japan: Evidence Based on Household Micro Data," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 19(2), pages 1-28, April.

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    More about this item

    Keywords

    wealth hypothesis; house prices; consumption; common factor hypothesis;
    All these keywords.

    JEL classification:

    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation

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