How Do House Prices Affect Consumption? Evidence from Micro Data

56 Pages Posted: 2 Feb 2005

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Joao F. Cocco

London Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2004

Abstract

Housing is a major component of wealth. Since house prices fluctuate considerably over time, it is important to understand how these fluctuations affect households' consumption decisions. Rising house prices may stimulate consumption by increasing households' perceived wealth, or by relaxing borrowing constraints. This paper investigates the response of household consumption to house prices using UK micro data. We estimate the largest effect of house prices on consumption for older homeowners, and the smallest effect, insignificantly different from zero, for younger renters.

This finding is consistent with heterogeneity in the wealth effect across these groups. It suggests that as the population ages and becomes more concentrated in the old homeowners group, aggregate consumption may become more responsive to house prices. In addition, we find that regional house prices affect regional consumption growth. Predictable changes in house prices are correlated with predictable changes in consumption, particularly for households that are more likely to be borrowing constrained, but this effect is driven by national rather than regional house prices and is important for renters as well as homeowners, suggesting that UK house prices are correlated with aggregate financial market conditions.

Suggested Citation

Campbell, John Y. and Cocco, João F., How Do House Prices Affect Consumption? Evidence from Micro Data (October 2004). Harvard Institute of Economic Research Discussion Paper No. 2045, Available at SSRN: https://ssrn.com/abstract=607161 or http://dx.doi.org/10.2139/ssrn.607161

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João F. Cocco

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Centre for Economic Policy Research (CEPR)

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