The role of housing market and credit on household consumption dynamics: Evidence from the OECD countries

Karolis Bielskis and Povilas Lastauskas

Journal of Economic Behavior & Organization, 2024, vol. 228, issue C

Abstract: We examine how fluctuations in the house price–rent spread, which reflect shifts in expectations about future house price growth, impact household consumption while considering the role of credit constraints. A rise in the spread, indicating higher expected future house prices relative to rents, boosts household consumption and eases credit constraints. By incorporating a housing spread shock into a model of household decision-making with borrowing frictions, we analyze data from 28 OECD countries over 50 years. Our findings demonstrate that shocks to the housing spread provide a sustained stimulus to household consumption by enhancing expected future wealth and reducing borrowing frictions. In contrast, credit shocks lead to immediate but short-lived ‘boom–bust’ cycles. The combined effects of housing spread and credit shocks reveal significant asymmetries, particularly during crises. These results highlight the need for policies that jointly address credit conditions and household expectations to effectively stabilize the economy.

Keywords: Household expectations; House prices; House rental rate; Borrowing frictions; Credit; Interest rates; Household consumption (search for similar items in EconPapers)
JEL-codes: D15 E21 E5 G51 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:228:y:2024:i:c:s016726812400355x

DOI: 10.1016/j.jebo.2024.106741

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