Housing Market Activity and Consumption: Macro and Micro Evidence

This paper analyses how developments in the housing market affect consumer spending. Using aggregate data, we show that housing wealth exerts a positive influence on consumption. Whilst informative, the aggregate results not allow us to identify housing wealth effects separately from credit effects, income expectations and complementarity effects. Survey data is therefore used to assess whether behaviour at the household level can further explain consumption trends at the aggregate level. We observe a strong correlation between house price levels and consumption for young, middle- and older-aged cohorts. The strong house price effects for younger cohorts in particular, who are predominantly renters, suggests that house prices are also a proxy for changes in in permanent income. However, our analysis also suggests that significant housing wealth effects are present, particularly when it comes to spending on durable goods. Our research highlights not only the benefits of combining household and aggregate level data for understanding consumption, but also the importance of decomposing consumption into its constituent parts for understanding housing wealth effects in particular.