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Evaluating household expenditures and their relationship with house prices at the microeconomic level

Over much of the past 40 years, cycles of house price and consumption growth have been closely synchronised in New Zealand. Three main hypotheses for this co-movement have been proposed in the literature. Firstly, an increase in house prices increase homeowners wealth, which increases their desired level of expenditure. Secondly, rising house prices may also facilitate additional consumption by reducing credit constraints to homeowners. Finally, house prices and consumption have been influenced by common factors, including expectations of future income growth. This paper uses repeated cross sectional analysis of household level data over the 1984 to 2007 period to ascertain which of these hypotheses is more valid for the New Zealand case. A positive correlation between real house prices and real household expenditures is evident for most tenure and age groupings. However, findings from this paper suggest that the house price and consumption relation is predominantly driven by wealth effects.

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File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/2010/dp10_01.pdf
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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2010/01.

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Length: 54 p
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:nzb:nzbdps:2010/01
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  1. Karl E. Case & John M. Quigley & Robert J. Shiller, 2001. "Comparing Wealth Effects: The Stock Market versus the Housing Market," Cowles Foundation Discussion Papers 1335, Cowles Foundation for Research in Economics, Yale University.
  2. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers 2345, C.E.P.R. Discussion Papers.
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  4. Leslie Hull, 2003. "Financial deregulation and household indebtedness," Reserve Bank of New Zealand Discussion Paper Series DP2003/01, Reserve Bank of New Zealand.
  5. Jeffrey M. Wooldridge, 2001. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262232197, June.
  6. John Y. Campbell & Joao F. Cocco, 2005. "How Do House Prices Affect Consumption? Evidence From Micro Data," Harvard Institute of Economic Research Working Papers 2083, Harvard - Institute of Economic Research.
  7. Mark van Zijll de Jong & Grant M. Scobie, 2006. "Housing: An Analysis of Ownership and Investment Based on the Household Savings Survey," Treasury Working Paper Series 06/07, New Zealand Treasury.
  8. Vladimir Klyuev & Paul S. Mills, 2006. "Is Housing Wealth An 'ATM'? the Relationship Between Household Wealth, Home Equity withdrawal, and Saving Rates," IMF Working Papers 06/162, International Monetary Fund.
  9. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
  10. Sven Rady, 2001. "Housing Market Dynamics: on the Contribution of Income Shocks and Credit Constraints," FMG Discussion Papers dp375, Financial Markets Group.
  11. Pietro Catte & Nathalie Girouard & Robert W.R. Price & Christophe André, 2004. "Housing Markets, Wealth and the Business Cycle," OECD Economics Department Working Papers 394, OECD Publishing.
  12. Grant Scobie & Trinh Le & John Gibson, 2007. "Housing in the Household Portfolio and Implications for Retirement Saving: Some Initial Finding from SOFIE," Treasury Working Paper Series 07/04, New Zealand Treasury.
  13. Orazio Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2005. "Consumption, house prices and expectations," Bank of England working papers 271, Bank of England.
  14. 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.
  15. Muellbauer, J & Murphy, A, 1996. "Booms and Busts in the UK Housing Market," Economics Papers 125, Economics Group, Nuffield College, University of Oxford.
  16. Emmanuel De Veirman & Ashley Dunstan, 2008. "How do Housing Wealth, Financial Wealth and Consumption Interact? Evidence from New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/05, Reserve Bank of New Zealand.
  17. 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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