Housing wealth effect

Charles W. Calomiris, Stanley D. Longhofer and William Miles take a closer look at the housing wealth effect and find that when consumption and house prices are looked at simultaneous effects of expected decline in future income, the influence is much lower than previously believed.

Other researchers have analysed data from Great Britain and have similarly found that, once one takes simultaneity problems into account, there is also little, if any, housing wealth effect in that country. Orazio Attanasio, Laura Blow, Robert Hamilton, and Robert Leicester (2009) express scepticism that a large housing wealth effect exists, and find, for instance, that (without correcting for simultaneity bias) the “wealth effect” appears to be the same for renters and homeowners. This would make no sense if household spending were really driven by housing wealth, because renters are actually hurt by rising home prices. They conclude, as we do, that housing wealth is acting mainly as an indicator of changes in perceived economic prospects, which apply to homeowners and non-homeowners alike.