Do House Prices Affect Consumption? A Comparison Exercise

Almudena Sevilla () and Annalisa Cristini

No 589, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: This paper undertakes a comparison exercise to disentangle what drives the opposite findings regarding the effect of house prices on consumption documented in two papers using the same data set for the UK. On the one hand, Campbell and Cocco (2007) find that old owners are the most benefited by a house price increase and young renters the least, confirming the so-called wealth hypothesis. On the other hand, Attanasio, Blow, Hamilton, and Leicester (2009) find that house prices have the same impact on consumption across age groups, consistent with the so-called common factor hypothesis. We rule out that changes in the sample period, the definition of consumption, the data source, the type of price deflator, and empirical considerations such as endogeneity bias and sampling noise in the construction of synthetic cohorts are the driving factors of the opposite conclusions reached by the two papers. All our evidence points towards the empirical specification, i.e., whether it is a consumption function (an equation for the level of consumption) or an Euler equation (an equation for consumption growth) as the only plausible explanation to the conflicting results. Our findings revive the debate of whether there is an effect of house prices on consumption, an issue of increasing importance in the current context of declining house prices in industrialized countries.

Keywords: Consumption; House prices; Wealth hypothesis; Common factor hypothesis (search for similar items in EconPapers)
JEL-codes: D13 (search for similar items in EconPapers)
Date: 2011-12-01
New Economics Papers: this item is included in nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://ora.ox.ac.uk/objects/uuid:ee33417c-13c6-4741-a90a-721d81298d40 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oxf:wpaper:589

Access Statistics for this paper

More papers in Economics Series Working Papers from University of Oxford, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Anne Pouliquen ( this e-mail address is bad, please contact ).