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Do House Prices Affect Consumption? A Comparison Exercise

Author

Listed:
  • Almudena Sevilla Sanz
  • Annalisa Cristini

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. We rule out that changes in the sample period, the definition of consumption, the data source, the type of price deflator, and empirical considerations such as endogeneity bias and sampling noise in the construction of synthetic cohorts are the driving factors of the opposite conclusions reached by the two papers. All our evidence points towards the empirical specification, i.e., whether it is a consumption function (an equation for the level of consumption) or an Euler equation (an equation for consumption growth) as the only plausible explanation to the conflicting results. Our findings revive the debate of whether there is an effect of house prices on consumption, an issue of increasing importance in the current context of declining house prices in industrialized countries.

Suggested Citation

  • Almudena Sevilla Sanz & Annalisa Cristini, 2011. "Do House Prices Affect Consumption? A Comparison Exercise," Economics Series Working Papers 589, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:589
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    References listed on IDEAS

    as
    1. Orazio Attanasio & Andrew Leicester & Matthew Wakefield, 2011. "Do House Prices Drive Consumption Growth? The Coincident Cycles Of House Prices And Consumption In The Uk," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 399-435, June.
    2. Slacalek Jiri, 2009. "What Drives Personal Consumption? The Role of Housing and Financial Wealth," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-37, October.
    3. Orazio Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2005. "Consumption, house prices and expectations," Bank of England working papers 271, Bank of England.
    4. Deaton, Angus, 1985. "Panel data from time series of cross-sections," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 109-126.
    5. Hryshko, Dmytro & José Luengo-Prado, María & Sørensen, Bent E., 2010. "House prices and risk sharing," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 975-987, November.
    6. Richard Disney & John Gathergood & Andrew Henley, 2010. "House Price Shocks, Negative Equity, and Household Consumption in the United Kingdom," Journal of the European Economic Association, MIT Press, vol. 8(6), pages 1179-1207, December.
    7. Dewald, William G & Thursby, Jerry G & Anderson, Richard G, 1988. "Replication in Empirical Economics: The Journal of Money, Credit and Banking Project: Reply," American Economic Review, American Economic Association, vol. 78(5), pages 1162-1163, December.
    8. Martin Browning & Mette Gørtz & Søren Leth‐Petersen, 2013. "Housing Wealth and Consumption: A Micro Panel Study," Economic Journal, Royal Economic Society, vol. 0, pages 401-428, May.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. House prices and consumption: how model specification matters
      by Economic Logician in Economic Logic on 2012-01-31 20:50:00

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    Cited by:

    1. Luc Arrondel & Pierre Lamarche & Frédérique Savignac, 2014. "Consommation et patrimoine des ménages : au‑delà du débat macroéconomique…," Économie et Statistique, Programme National Persée, vol. 472(1), pages 21-48.

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    More about this item

    Keywords

    Consumption; House prices; Wealth hypothesis; Common factor hypothesis;
    All these keywords.

    JEL classification:

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

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