The housing wealth effect: Quasi-experimental evidence

We exploit a quasi-experiment that occurred in Stockholm in 2007 to provide new evidence on the magnitude of the housing wealth e.ect. Stockholm's smaller city airport was expected to close in 2011 but its operating contract was unexpectedly renewed after political negotiation behind closed doors. We estimate an immediate shock of approximately -17% to house prices close to the airport. Using a household data set with granular geographic information on primary residence, we find an elasticity among purchasers of new cars equal to 0.5. Converting our estimate to an aggregate MPC on cars, it is however less than 0.2 cents per dollar which in turn is likely to imply an MPC less than 3 cents per dollar on all goods and services. The effect is concentrated to homeowners with a loan-to-value ratio between 0.6 and 0.8, highlighting the role of credit and mortgage markets also in normal economic times.