How Do House Prices Affect Consumption? Evidence from Micro Data

76 Pages Posted: 19 Sep 2005 Last revised: 9 Jul 2022

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Joao F. Cocco

London Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2005

Abstract

Housing is a major component of wealth. Since house prices fluctuate considerably over time, it is important to understand how these fluctuations affect households' consumption decisions. Rising house prices may stimulate consumption by increasing households' perceived wealth, or by relaxing borrowing constraints. This paper investigates the response of household consumption to house prices using UK micro data. We estimate the largest effect of house prices on consumption for older homeowners, and the smallest effect, insignificantly different from zero, for younger renters. This finding is consistent with heterogeneity in the wealth effect across these groups. In addition, we find that regional house prices affect regional consumption growth. Predictable changes in house prices are correlated with predictable changes in consumption, particularly for households that are more likely to be borrowing constrained, but this effect is driven by national rather than regional house prices and is important for renters as well as homeowners, suggesting that UK house prices are correlated with aggregate financial market conditions.

Suggested Citation

Campbell, John Y. and Cocco, João F., How Do House Prices Affect Consumption? Evidence from Micro Data (August 2005). NBER Working Paper No. w11534, Available at SSRN: https://ssrn.com/abstract=779944

John Y. Campbell (Contact Author)

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João F. Cocco

London Business School ( email )

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Centre for Economic Policy Research (CEPR)

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