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

_IMF Working Papers, December 8, 2023_

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## Bibliographic details
- Authors: Serhan Cevik, Sadhna Naik
- Published: December 8, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400261367.001

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### Overview
- 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.

### Data and empirical approach
- 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.

### Key findings
- 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.

### Quantitative estimates and scenario
- 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.

### Policy implications and interpretation
- 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2023/12/08/feeling-rich-feeling-poor-housing-wealth-effects-and-consumption-in-europe-542221_