Consumption, House Prices and Expectations

Abstract

Over much of the past 25 years, the cycles of house price and consumption growth have been closely synchronised. Three main hypotheses for this co-movement have been proposed in the literature. First, that an increase in house prices raises households' wealth, particularly for those in a position to trade down the housing ladder, which increases their desired level of expenditure. Second, that house price growth increases the collateral available to homeowners, reducing credit constraints and thereby facilitating higher consumption. And third, that house prices and consumption have tended to be influenced by common factors. This paper finds that the relationship between house prices and consumption is stronger for younger than older households, and that the consumption of homeowners and renters are equally aligned with the house price cycle. This suggests that neither the wealth nor the collateral channels have been the principal cause of the relationship between house prices and consumption - instead, the most important factor is likely to have been common causality.