Financial Market and Housing Wealth Effects on Consumption

30 Pages Posted: 16 Feb 2005

See all articles by Arnold C S Cheng

Arnold C S Cheng

Hong Kong Polytechnic University

Michael K. Fung

Hong Kong Polytechnic University - School of Accounting & Finance

Date Written: February 2005

Abstract

The objective of this study is to examine the financial market and housing wealth effects on consumption. Housing has the dual functions as both a commodity yielding a flow of housing services and an investment asset yielding a flow of capital income. The findings from this study suggest that a rise in housing price has both a positive wealth effect and a negative price effect on consumption. While the positive wealth effect is caused by an increase in capital income, the negative price effect is caused by an increase in the cost of housing services. In addition, the housing market wealth effect increases, at the expense of the price effect, with the levels of leverage and homeownership of the housing market. These findings imply that the government policy of land supply aiming to stimulate the economy should strike a balance between the possible wealth and price effects of the housing market.

Keywords: Consumption, Housing market, Financial market, Wealth effect

JEL Classification: D12, E2, R21, R34

Suggested Citation

Cheng, Arnold C S and Fung, Michael K., Financial Market and Housing Wealth Effects on Consumption (February 2005). Available at SSRN: https://ssrn.com/abstract=667681 or http://dx.doi.org/10.2139/ssrn.667681

Arnold C S Cheng

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

Michael K. Fung (Contact Author)

Hong Kong Polytechnic University - School of Accounting & Finance ( email )

Hung Hom, Kowloon
Hong Kong

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