How Do Housing Prices Affect Consumption

Here is an interesting write up of some recent research at the National Bureau of Economic Research. How do housing prices affect consumption?

The standard story is that an increase in the price of a house is a wealth increase for the household, and hence will lead to an increase in consumption. However, there are a couple of reasons to think this might not be the case. The first is that there is no real theoretical justification for this. If the price of the house goes up, the only way for the household to enjoy additional consumption is to consume less “housing services”–i.e. sell the current house and move into a cheaper house. The homeowner who does not do this is basically paying a higher implicit rental cost of housing. The other reason why consumption may be positively correlated to housing prices is that an increase in the price of the house may allow borrowing constrained households to smooth out consumption over the life cycle via a loan. What the loan accomplishes is to allow the household to borrow from future consumption today. That is, suppose the household is constrained in terms of borrowing. Then the house price increases by say $100,000. This could allow the household to borrow against this future consumption (when the household sells the house several years or decades hence) and consume it today.

Micro data can be helpful because they allow the authors to identify those households for which the direct wealth effect of house prices is particularly large or small. Older homeowners and younger renters represent households that are most likely to gain and lose from house price increases. Consistent with a direct wealth effect, the authors estimate a large positive effect of house prices on consumption for the cohort of old households who are homeowners, and an effect that is close to zero for the cohort of young households who are renters.

The authors also find that, controlling for economy-wide house prices and for regional income, regional house prices do influence regional consumption. This is a key result for policymakers and economists, showing that it is important to allow for regional heterogeneity when estimating the effects of house prices on consumption.

Finally, the authors find that consumption responds to predictable changes in house prices, consistent with the idea that an increase in house prices relaxes borrowing constraints.


The findings of this study have macroeconomic implications because they suggest that aggregate consumption may become more responsive to house prices as older homeowners become an increasing fraction of the population. In recent years, both the United Kingdom and the United States have experienced rising property prices and strong private consumption, pointing to the relevance of the authors’ estimates.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.


  1. beloml says:

    I believe you mean “affect” instead of “effect” in your headline and first paragraph.

  2. legion says:

    This makes perfect sense to anyone who’s ever bought a house for living purposes (rather than explicitly for investment). I just bought my first hous this past summer, and let me tell you – even though the mortgage vs. rent payment mostly balances out, there are a lot more things I pay for now – minor repairs, certain utilities, etc. And as a result I can absolutely state that my level of consumption has gone down!

  3. Steve Verdon says:



    Dang, looks like James is covering for me again! 😮


    As a homeowner I completely sympathize. Actually your consumption is the same, it is just things your “fun consumption” has gone into maintaining the house.

  4. ken says:

    legion, if you paying for a lot more things now than you were before you bought your house, then your ‘consumption’ has actually gone up, not down.

    The purchase of a house usually leads to higher spending as people paint, change the carpets, buy new furniture, drapes, and other things to fill the space. There is inummerable numbers of small items, hose nozzles, lawn fertilizer, tulip bulbs, etc, etc etc, that people buy once they become a homeowner that they do not buy as a renter.

  5. Steve Verdon says:

    Holy sheep dip…I think this is what…the second time, ever, I’ve agreed with Ken. Yikes, I’d better go to the doctor!

  6. Dave Schuler says:

    I’d sure like to see a definition of “borrowing constrained” that corresponded both to the intuitive notions that the term conjures up and to what the actual data says about who’s borrowing using home equity lines of credit.

    Among my circle of acquaintances at least those who are most likely to borrow against home equity lines of credit are those you’d be least likely to characterize as “borrowing constrained” and are lured into it by the convenience—it isn’t a lot harder than using a credit card.

    I’m also suspicious about trying to generalize from behavior patterns in the UK to draw any conclusions about behavior patterns in the US. Bank regulations are pretty different, for one thing.

  7. Steve Verdon says:


    Well, if you aren’t borrowing constrained, the working paper costs only $5. 🙂

  8. Rick DeMent says:

    What happens if they borrow against the house, spend the $$$ on consumption and then the value of the house goes down?

    It just becomes garden variety borrowing then right, and unsecured at that.