New and contrary results on the wealth effect for housing:
Homeowners do not increase consumption despite their property rising in value, EurekAlert: Although the value of our property might rise, we do not increase our consumption. This is the conclusion by economists from University of Copenhagen and University of Oxford in new research which is contrary to the widely believed assumption amongst economists that if there occurs a rise in house prices then a natural rise in consumption will follow. The results of the study is published in The Economic Journal.
"We argue that leading economists should not wholly be focused on monitoring the housing market. Economists are closely watching the developments on the housing market with the expectation that house prices and household consumption tend to move in tandem, but this is not necessarily the case," says Professor of Economics at University of Copenhagen, Søren Leth-Petersen.
Søren Leth-Petersen has, alongside Professor Martin Browning from University of Oxford and Associate Professor Mette Gørtz from University of Copenhagen, tested this widespread assumption of 'wealth effect' and concluded that the theory has no significant effect.
Søren Leth-Petersen explains that when economists use the theory of 'wealth effect' the presumption is that older homeowners will adjust their consumption the most when house prices change whilst younger homeowners will adjust their consumption the least. However, according to this research, most homeowners do not feel richer in line with the rise of housing wealth.
"Our research shows that homeowners aged 45 and over, do not increase their consumption significantly when the value of their property goes up, and this goes against the theory of 'wealth effect'. Thus, we are able to reject the theory as the connecting link between rising house prices and increased consumption," explains Søren Leth-Petersen. ...
The research shows that homeowners aged 45 and over did not react significantly to the rise in house prices. However, the younger homeowners, who are typically short of finances, took the opportunity to take out additional consumption loans when given the chance. ...