Housing Wealth Isn't Wealth

25 Pages Posted: 18 Dec 2010

See all articles by Willem H. Buiter

Willem H. Buiter

Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University; Independent Economic Adviser; Independent

Multiple version iconThere are 4 versions of this paper

Date Written: 2009

Abstract

A fall in house prices due to a change in its fundamental value redistributes wealth from those long housing (for whom the fundamental value of the house they own exceeds the present discounted value of their planned future consumption of housing services) to those short housing. In a closed economy representative agent model and in the Yaari-Blanchard OLG model used in the paper, there is no pure wealth effect on consumption from a change in house prices if this represents a change in their fundamental value. There is a pure wealth effect on consumption from a change in house prices if this reflects a change in the speculative bubble component of house prices. Two other channels through which a fall in house prices can affect aggregate consumption are (1) redistribution effects if the marginal propensity to spend out of wealth differs between those long housing (the old, say) and those short housing (the young, say) and (2) collateral or credit effects due to the collateralisability of housing wealth and the non-collateralisability of human wealth. A decline in house prices reduces the scope for mortgage equity withdrawal. For given sequences of future after-tax labour income and interest rates, this may depress consumption in the short run while boosting it in the long run.

Keywords: Wealth effect, house prices, speculative bubbles

JEL Classification: E2, E3, E5, E6, G1

Suggested Citation

Buiter, Willem H., Housing Wealth Isn't Wealth (2009). Economics Discussion Paper No. 2009-56, Available at SSRN: https://ssrn.com/abstract=1726760 or http://dx.doi.org/10.2139/ssrn.1726760

Willem H. Buiter (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Columbia University ( email )

420 West 118th Street
New York, NY
United States

Independent Economic Adviser ( email )

Independent ( email )

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
33
Abstract Views
1,682
PlumX Metrics