The Life-Cycle Effects of House Price Changes

Wenli Li and Rui Yao

Journal of Money, Credit and Banking, 2007, vol. 39, issue 6, pages 1375-1409

Abstract: We develop a life-cycle model that explicitly incorporates the dual feature of housing as both a consumption good and an investment asset. Our analysis indicates that the consumption and welfare consequences of house price changes on individual households vary significantly. In particular, the non-housing consumption of young and old homeowners is much more sensitive to house price changes than that of middle-aged homeowners. More importantly, while house price appreciation increases the net worth and consumption of all homeowners, it only improves the welfare of old homeowners. Renters and young homeowners are worse off due to higher lifetime housing consumption costs. Copyright 2007 The Ohio State University.

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