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Home Prices and Household Spending

Author

Listed:
  • Callan Windsor

    (Reserve Bank of Australia)

  • Jarkko Jääskelä

    (Reserve Bank of Australia)

  • Richard Finlay

    (Reserve Bank of Australia)

Abstract

This paper explores the positive relationship betwen home prices and household spending by following a panel of Australian households over the period 2003 to 2010. There are three hypotheses put forth in the literature to explain this relationship: (1) increases in home prices raise spending via a 'traditional wealth effect'; (2) increases in home prices raise spending by easing credit constraints; and (3) home prices and spending are influenced by a common 'third factor' such as something that affects expectations regarding future income. Identifying differences in behaviour across households of different ages helps to distinguish among these hypotheses. Younger homeowners exhibit the largest home-price wealth effects, with a 3 to 4 cent increase in spending per dollar increase in home price. As young homeowners are more likely to be credit constrained, their relatively large marginal propensity to spend supports hypothesis (2) as an important determinant of the co-movement between home prices and household spending. Further, the non-response of young renters to changes in home prices argues against hypothesis (3).

Suggested Citation

  • Callan Windsor & Jarkko Jääskelä & Richard Finlay, 2013. "Home Prices and Household Spending," RBA Research Discussion Papers rdp2013-04, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2013-04
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    File URL: https://www.rba.gov.au/publications/rdp/2013/pdf/rdp2013-04.pdf
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    References listed on IDEAS

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    1. John V. Duca & John Muellbauer & Anthony Murphy, 2011. "House Prices and Credit Constraints: Making Sense of the US Experience," Economic Journal, Royal Economic Society, vol. 121(552), pages 533-551, May.
    2. Richard Disney & Sarah Bridges & John Gathergood, 2010. "House Price Shocks and Household Indebtedness in the United Kingdom," Economica, London School of Economics and Political Science, vol. 77(307), pages 472-496, July.
    3. Fisher, Lance A. & Otto, Glenn & Voss, Graham M., 2010. "The response of Australian consumption to housing wealth," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 284-299, March.
    4. Frederic S. Mishkin, 2007. "Housing and the monetary transmission mechanism," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 359-413.
    5. Orazio P. Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2009. "Booms and Busts: Consumption, House Prices and Expectations," Economica, London School of Economics and Political Science, vol. 76(301), pages 20-50, February.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Christian Gillitzer & Jin Cong Wang, 2015. "Housing Wealth Effects: Cross-sectional Evidence from New Vehicle Registrations," RBA Research Discussion Papers rdp2015-08, Reserve Bank of Australia.
    2. Finlay Richard & Price Fiona, 2015. "Household saving in Australia," The B.E. Journal of Macroeconomics, De Gruyter, vol. 15(2), pages 677-704, July.
    3. Windsor, Callan & La Cava, Gianni & Hansen, James, 2015. "Home price beliefs: Evidence from Australia," Journal of Housing Economics, Elsevier, vol. 29(C), pages 41-58.
    4. Richard Finlay & Fiona Price, 2014. "The Rise in Household Saving," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 1-10, June.
    5. Kadir Atalay & Stephen Whelan & Judith Yates, 2016. "House Prices, Wealth and Consumption: New Evidence from Australia and Canada," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(1), pages 69-91, March.
    6. Fiona Price & Benjamin Beckers & Gianni La Cava, 2019. "The Effect of Mortgage Debt on Consumer Spending: Evidence from Household-level Data," RBA Research Discussion Papers rdp2019-06, Reserve Bank of Australia.
    7. Callan Windsor & Gianni La Cava & James Hansen, 2014. "Home Price Beliefs in Australia," RBA Research Discussion Papers rdp2014-04, Reserve Bank of Australia.

    More about this item

    Keywords

    dwelling prices; consumption; micro data;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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