There is strong evidence that house prices and consumption are closely synchronized. There is, however, disagreement over the causes of this link. This paper examines if there is a wealth effect of house prices on consumption. We use a rich household level panel data set with information about house ownership, income, wealth, and demographics for a large sample of the Danish population in the period 1987-1996. We model the dependence of the growth rate of total household expenditure with unanticipated innovations to house prices. Controlling for factors related to competing explanations, we find little evidence of a housing wealth effect on consumption: unexpected innovations to house prices are uncorrelated with changes in total expenditure at the household level. A reform in 1992 allowed – for the first time - house owners to use their housing equity as collateral for consumption loans. We find that young house owners likely to be affected by credit constraints react to house price changes after 1993. Our findings suggest that house prices impact total expenditure through improved collateral rather than directly through wealth.
Economic Journal, 2013, Vol 123, Issue 568, p. 401-428