An Empirical Assessment of House Price Adjustments on Aggregate Consumption

This study measures the effect of changes in net housing and financial wealth on household consumption. The link between consumption, income and net wealth is measured within a Dynamic Ordinary Least Squares and a Dynamic Generalised Least Squares framework for the period Q2:1988-Q1:2003. It is found a permanent one dollar rise in housing wealth leads to a six cent increase in consumption, three times the effect of a one dollar rise in net financial wealth. A policy experiment is conducted to quantify the effect of a fall in house prices on aggregate consumption. The house price fall is defined as the price movement required to realign house prices to a steady state valuation using a price-to-rental yield indicator. If the required house price realignment were to occur over one year, it is estimated that household consumption would fall by 4.1 to 10.6 per cent.