Homeowners do not increase consumption despite their property rising in value, research shows

May 15, 2013

Although the value of our property might rise, we do not on that account increase our consumption. This is the conclusion by economists from University of Copenhagen and University of Oxford in new research which is contrary to the widely believed assumption amongst economists that if there occurs a rise in house prices then a natural rise in consumption will follow. The results of the study is published in the scientific journal The Economic Journal.

"We argue that leading economists should not wholly be focussed on monitoring the housing market. Economists are closely watching the developments on the housing market with the that house prices and household consumption tend to move in tandem, but this is not necessarily the case," says Professor of Economics at University of Copenhagen, Søren Leth-Petersen.

Søren Leth-Petersen has, alongside Professor Martin Browning from University of Oxford and Associate Professor Mette Gørtz from University of Copenhagen, tested this widespread assumption of 'wealth effect' and concluded that the theory has no significant effect.

Homeowners do not increase their consumption

Søren Leth-Petersen explains that when economists use the theory of 'wealth effect' the presumption is that older homeowners will adjust their consumption the most when house prices change whilst younger homeowners will adjust their consumption the least. However, according to this research, most homeowners do not feel richer in line with the rise of housing wealth.

"Our research shows that homeowners aged 45 and over, do not increase their consumption significantly when the value of their property goes up, and this goes against the theory of 'wealth effect'. Thus, we are able to reject the theory as the connecting link between rising house prices and increased consumption," explains Søren Leth-Petersen.

He believes that the reluctance by the homeowners stems from the fact that, for some people, houses or properties do not solely represent a financial value or asset, as for example registered securities or a car.

"Our house is our home and we all need a place to live. That is why homeowners in reality act different than the theory stipulates," says Søren Leth-Petersen.

In turn, Leth-Petersen suggests that it depends on the prospects of higher earnings which prompt homeowners to increase their consumption. Higher earnings also prompt investments into more expensive property and this creates rises to house prices on the .

Scientifically important time period

The strength of the research lies in access to detailed individual data whereas economic theories usually have been developed based on calculations of averages on entire populations. This research has accessed household-level panel data which has then been grouped and studied.

The researchers have analysed Danish tax administration data and combined information about income, wealth and savings as well as home ownership, age, education and family composition from 90,000 households and almost 400,000 observations for the period 1987-1996.

According to Søren Leth-Petersen, this period is particularly interesting because homeowners underwent a cycle in which house prices declined from 1987 to 1992 and then increased from 1993 to 1996. The period is also interesting because it was not possible for homeowners to use their house as security for consumption loans before 1992. This enabled the researchers to establish how households took out consumption loans based on their housing equity when such loans were introduced.

The research shows that homeowners aged 45 and over did not react significantly to the rise in house prices. However, the younger , who are typically short of finances, took the opportunity to take out additional consumption loans when given the chance.

An international discourse

In an international light, Denmark is a small country with large amounts of data which through decades has been gathered systematically. This makes Denmark well-suited for economic research, but this particular research, according to Søren Leth-Petersen, should be an international theoretical discussion regarding 'wealth effect'. Also British studies suggest similar findings to the results of that of his and his colleagues' recent research.

The results of the study 'Housing Wealth and : A Micro Panel Study' is published in print 15 May in the acclaimed scientific journal 'The Economic Journal'.

Explore further: The significance of digits: just how reliable are reported numbers?

More information: onlinelibrary.wiley.com/doi/10… /ecoj.12017/abstract

add to favorites email to friend print save as pdf

Related Stories

Research reveals likely housing winners and losers

Oct 12, 2010

There is a great deal of uncertainty and speculation about the direction of the housing market in the UK and the USA -- both for home-owners and renters. Social Scientists funded by the Economic and Social Research Council ...

Consumer confidence continues to improve in March

Apr 01, 2013

Consumer confidence continued to improve in March due to more positive signs of expanding employment, according to University of Michigan economist Richard Curtin, director of the Thomson Reuters/University ...

Recommended for you

Consumer sentiment brightens holiday spending

12 hours ago

Consumer confidence posted its fourth consecutive monthly gain in November, rising to its highest level since July 2007, according to the Thomson Reuters/University of Michigan Surveys of Consumers.

Over-identifying restrictions in economic analysis

Nov 25, 2014

The analysis of empirical economics has long made use of a tool called the generalized method of moments (GMM). This method is used as a generic way of estimating parameters in an empirical model where the ...

User comments : 4

Adjust slider to filter visible comments by rank

Display comments: newest first

antialias_physorg
3.7 / 5 (3) May 15, 2013
Our research shows that homeowners aged 45 and over, do not increase their consumption significantly when the value of their property goes up

Or...homeOWNERS do not have more disposable income just because their property value goes up? Property values are fixed in the property. They do not contribute to your available money stash.

So why would anyone even think that rising property values correlate with increased consumption?
Lurker2358
1 / 5 (1) May 15, 2013
Because the authors of the study, and the article, are probably completely clueless as to how normal people live...

It's sort of like the financial channels on television, they're all supposed "experts," but they made everyone else lose all their money when the housing bubble burst, which I think was the largest criminal robbery in U.S. history, but maybe that's another issue.
VendicarE
5 / 5 (1) May 15, 2013
This result runs counter to the theories, expectation, and ideology of Economists from the Chicago school of Economics and their Ideological mentor Ludwig Von Mises.

These Economists and their theories have proven to be an economic disaster wherever they have been adopted. Americans are seeing their standards of living decrease, wages stagnate, and their national debt explode.

In the Soviet Union the result was a complete implosion of the National Economy that lasted 20 years.

When you hear someone mention Von Mises, you know they are referring to an Ideological failure.
Shakescene21
not rated yet May 16, 2013
This study might be valid for Denmark, but it is not applicable to the USA. In the US we are able to tap into the increasing value of our homes with refinancings and home equity lines of credit (HOLCs). Like most middle-aged middle-class Americans I was able to use my HOLC to finance cars, college educations, weddings, credit card consolidation, and more. This was a major driver of the US economy during the housing boom. The collapse in house prices from 2007-2012 wiped out trillions of dollars in home equity and has badly restricted the ability of homeowners to fund consumption from HOLCs.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.