How do house prices affect consumption? Evidence from micro data.

Housing wealth is a major component of households' wealth. Since house prices fluctuate considerably over time, an important question is how house price fluctuations affect households' consumption decisions. This may happen through at least two channels: (i) a wealth channel, or (ii) by relaxing or making borrowing constraints more severe. This paper investigates the response of household consumption to house prices using micro level data. We estimate a positive wealth effect on consumption of house price shocks for older households who are homewoners, and a negative wealth effect for young households who are renters. These are the households that are more likely to be long and short housing, respectively. We also find that consumption responds to predictable changes in house prices, an effect which is consistent with an increase in house prices relaxing borrowing constraints.