The Life-Cycle Effects of House Price Changes

39 Pages Posted: 31 Jul 2005

See all articles by Wenli Li

Wenli Li

Federal Reserve Bank of Philadelphia

Rui Yao

Baruch College - Department of Economics and Finance

Date Written: April 2005

Abstract

The authors develop a life-cycle model to study the effects of house price changes on household consumption and welfare. The model explicitly incorporates the dual feature of housing as both a consumption good and an investment asset and allows for costly adjustments in housing and mortgage positions. Li and Yao's analysis indicates that although house price changes have small aggregate effects, their consumption and welfare consequences on individual households vary significantly. In particular, the non-housing consumption of young and old homeowners is much more sensitive to house price changes than that of middle-aged homeowners. More importantly, while house price appreciation increases the net worth and consumption of all homeowners, it only improves the welfare of middle-aged and old homeowners. Young homeowners and renters are worse off due to higher life-cycle housing consumption costs.

Keywords: Life-cycle model, consumption, savings, housing, mortgage

JEL Classification: E21, R21

Suggested Citation

Li, Wenli and Yao, Rui, The Life-Cycle Effects of House Price Changes (April 2005). FRB Philadelphia Working Paper No. 05-7, Available at SSRN: https://ssrn.com/abstract=748304 or http://dx.doi.org/10.2139/ssrn.748304

Wenli Li (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Rui Yao

Baruch College - Department of Economics and Finance ( email )

One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3494 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://zicklin.baruch.cuny.edu/faculty/profiles/yao.html

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