The Impact of House Prices on Consumption in the UK: A New Perspective

32 Pages Posted: 7 Dec 2017

Date Written: January 2018

Abstract

This paper proposes an alternative approach to the question of how house prices influence household consumption by focusing on their impact on mortgage equity withdrawal and household saving. Household‐level data are used to derive a measure of expected and unexpected changes in house prices; these are then incorporated into a recursive bivariate probit model of the decision to withdraw housing equity and save. The results suggest that households respond to changes in their housing wealth primarily by increasing their mortgage borrowing, rather than by decreasing their savings, although this is mainly for younger households. However, while changes in housing wealth do not have a direct impact on household saving, they do have an important indirect impact, since they increase the likelihood that the household will withdraw equity, which in turn has a negative impact on household saving.

Suggested Citation

Burrows, Vivien, The Impact of House Prices on Consumption in the UK: A New Perspective (January 2018). Economica, Vol. 85, Issue 337, pp. 92-123, 2018. Available at SSRN: https://ssrn.com/abstract=3083170 or http://dx.doi.org/10.1111/ecca.12237

Vivien Burrows (Contact Author)

University of Reading ( email )

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