Feeling Rich, Feeling Poor: Housing Wealth Effects and Consumption in Europe

IMF Working Papers, December 8, 2023

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Canonical URL: Feeling Rich, Feeling Poor: Housing Wealth Effects and Consumption in Europe

Households across Europe are facing a double crisis—the worst inflation shock since the World War II and a sudden correction in house prices.
The paper reviews a rich literature showing mixed results on how housing price cycles affect consumer spending, with a wide range of consumption responses to changes in housing wealth.
Using quarterly data on 20 countries in Europe over the period 1980–2023, the authors analyze the dynamic relationship between inflation-adjusted housing wealth and consumer spending and report statistically significant and economically intuitive results.

Quarterly data on 20 countries in Europe over the period 1980–2023.
Key variables analyzed include real house prices (inflation-adjusted housing wealth), household consumption, and gross disposable income.
The estimated model captures dynamic responses of household consumption to changes in real house prices and gross disposable income.

Household consumption responds positively and swiftly to changes in real house prices and gross disposable income.
The authors obtain statistically significant and economically intuitive coefficients linking housing wealth to consumer spending.
The paper emphasizes heterogeneity in the literature but reports consistent positive short-run consumption responses in the sample studied.

The average quarter-on-quarter decline of -1.96 percent in real house prices in the first quarter of 2023 in Europe could dampen consumer spending by about -0.51 percentage points in real terms on a cumulative basis over a horizon of eight quarters.
The analysis focuses on the dynamic cumulative impact of house-price changes on consumer spending over an eight-quarter horizon.

Given the positive and swift response of consumption to real house-price changes, sudden corrections in house prices can have material dampening effects on aggregate consumer spending.
Policymakers monitoring inflation and housing markets should account for the transmission from housing wealth changes to private consumption when assessing near-term demand and designing supportive measures.

Source: Feeling Rich, Feeling Poor: Housing Wealth Effects and Consumption in Europe; Serhan Cevik and Sadhna Naik; December 8, 2023.